Structural economic changes over time have increased the value of digital technologies. Recent advances in this area, such as analytics, big data, cloud computing and artificial intelligence, have led nontech firms to follow the tech industry’s lead and invest in digital technologies on a large scale. How has this increased uptake of digital technology affected the value of nontech firms? To answer this question, HKUST’s Wilbur Chen and Professor Suraj Srinivasan from HBS, examine a large dataset of all nontech firms listed in the United States during 2010–2020.

“Our aim is to identify, characterize and examine the economic performance of firms from nontech industries that are among the first movers in engaging in digital activities,” say the researchers. They develop a novel text-based measure that sheds light on how firms’ characteristics affect their digital engagement. With this measure, the authors show that “firms that are larger, younger, and face more uncertainty tend to engage more in digital activities”. In addition, firms with more selling, general, and administrative expenditures engage in digital activity to a greater extent than firms with more capital expenditures.

The authors also observe an increase in valuation after “going digital.” Specifically, “the market-to-book of firms that engage in digital activities is 8%–26% higher” than that of their industry peers. Digging deeper, the authors explore whether digital activities are also predictive of higher future returns. Moreover, the authors also find some evidence that “digital activities offer gains in firm productivity,”. On the other hand, they find that “profit margins and sales growth are either insignificantly or negatively associated with digital activities.”

These novel findings have important implications for investors, as “trading strategies formed on digital disclosure tend to perform well.” Notably, the authors show that a portfolio based on digital disclosure in their sample yields “a 30% risk-adjusted return” over a three-year horizon. However, the authors advocate some caution in interpreting these results, as “real-time profits are likely to be lower than the returns reported,” due to trading frictions.