Firms’ digital transformation and management earnings forecasts: Evidence from China

Abstract

This paper examines the impact of firms' digital transformation on management earnings forecasts with a sample of Chinese firms. Using a deep learning model and textual analysis, we create a proxy for digital transformation based on the frequency of keywords related to digitization in firms' annual reports. Our empirical results reveal that firms that engage in more digital transformation are more likely to issue management earnings forecasts voluntarily, more often, and with greater precision. The findings are robust to alternative metrics of management earnings forecasts and digital transformation, after accounting for endogeneity, and after considering firms' future forecasts. Additional analyses on the transmission mechanisms suggest that digital transformation improves firms’ information environment, enhances internal controls, and alleviates agency problems.

Keywords

• G10
• M15
• M41