Dividend policy and corporate digital transformation

Purpose This study outlines and tests two channels through which digital transformation may impact dividend policy in China. The financing channel posits that digital transformation increases corporate financing needs, which prompts firms to establish a positive reputation using dividend payouts for raising external funds. The governance channel suggests that digital transformation replaces the governance role of dividends in reducing agency conflicts and thus reduces dividends. Design/methodology/approach The authors employ 30,710 firm-year observations of Chinese listed firms from 2009 to 2021 and use Tobit and OLS regressions to complete the empirical test. Findings Digital transformation affects dividends through an inverse U-shaped relationship. Further analyses show that dividends significantly reduce the equity cost of capital for low-digital-transformation firms and digital transformation can replace the governance role of dividends by reducing information asymmetry. Moreover, dividends are capitalized at larger values for low-digital-transformation firms than for high-digital-transformation firms. Practical implications The results show that digital transformation serves as a substitute for dividends in corporate governance. The positive impact of digital transformation on the valuation effects associated with dividends is concentrated in low-digital-transformation firms, suggesting that dividends have stronger reputation effects when the degree of digital transformation is low. Originality/value This study is among the first to examine how digital transformation influences dividend policy in China, which provides practical insights for firms to design dividend policies aligned with digital transformation strategies to maximize firm value.