Going Digital: Implications for Firm Value and Performance

Wilbur  Chen; Suraj  Srinivasan

Working Paper | HBS Working Paper Series | 2019

Going Digital: Implications for Firm Value and Performance

Abstract

We examine the firm value and performance implications of the growing trend of non-technology (non-tech) companies adopting digital technologies such as artificial intelligence, big data, cloud computing, and machine learning. For the entire universe of U.S. publicly listed firms, we identify companies that are going digital using textual analysis of corporate financial reports and conference calls. We first show that digital adoption by non-tech firms has dramatically grown in recent years. Non-tech digital adopters exhibit greater stock price co-movement with technology companies than with their industry peers, suggesting that the digital activities are making them similar to tech firms. The digital adopters hold more cash and are larger, younger, and less CapEx-intensive. Digital adoption is associated with higher valuation―market-to-book ratio is higher by 7%–21% compared to industry peers—and is higher for firms that are younger, more CapEx-intensive, exhibit higher sales growth, and are in industries where digital adoption is prevalent. However, markets are slow to respond to the disclosure of digital activity. Portfolios formed on digital disclosure earn a size/book-to-market adjusted return of 25% over a 3-year horizon and generate a monthly alpha of 40 basis points. Finally, while there is no significant improvement in financial performance as measured by return-on-assets conditional on digital activities, there is a significant increase in asset turnover as well as a significant decline in margins and sales growth. Managerial expertise is important for digital technology adoption, as firms with senior technology executives perform better when going digital.

Keywords: digital technologies; Business Ventures; Technology Adoption; Valuation; Performance; Management; Experience and Expertise;

Language: English

Format: Print

59 pages

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Citation:

Chen, Wilbur, and Suraj Srinivasan. "Going Digital: Implications for Firm Value and Performance." Harvard Business School Working Paper, No. 19-117, May 2019.

On August 7, 2018 Elon Musk, Chairman and CEO of Tesla tweeted that he was considering taking Tesla private and had secured funding. Weeks went by without details about a deal and speculation grew that Musk had misled investors. He soon abandoned the idea, but the Securities and Exchange Commission (SEC) charged him with violating securities laws by either knowingly or recklessly misleading investors. The lawsuit was settled with Musk agreeing to step down as Tesla chairman for three years while remaining as a director on the board and CEO. On November 7, 2018, Tesla announced the appointment of Robyn Denholm as Chair of the Tesla Board. Observers were cautiously optimistic that an independent chairman could ease longstanding governance concerns. Ms. Denholm was regarded as a good choice, but details about her role remained unclear and the jury was still out on her independence from Musk.

Teaching Note for HBS No. 119-013. The case facilitates a discussion about corporate governance and its role in achieving sustainable profitability and driving long-term shareholder value. The discussion can focus on such questions as what constitutes good governance, board independence, and/or the role of the chair of the board and the board of directors in managing company executives. The case also highlights the interactions between the company and market intermediaries such as credit rating agencies, short sellers, and equity analysts and explores the costs and benefits of operating as a publicly traded company. The case also introduces the role of the Securities and Exchange Commission (SEC) along with the securities and disclosure laws that the SEC is charged with enforcing.

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Going Digital: Implications for Firm Value and Performance

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