Does digital transformation lower equity financing costs? An explanation based on the “return-risk-expectation” framework

In the context of existing literature being fragmented and lacking systematicity, the relationship between corporate digital transformation and the cost of equity financing is re-examined by constructing a return-risk-expectation theoretical framework. We found that corporate digital transformation significantly reduces equity financing costs; this conclusion still holds after a series of robustness tests. Corporate digital transformation improves investors' expectations by increasing their future earnings and lowering their risk levels. As a result, to share firms’ growth potential, investors will lower the cost of equity. Moreover, by constructing the lifecycle model, we explored the heterogeneity condition from a time-dynamic perspective and found the inhibiting effect is more pronounced in firms staying in growth and mature stages. Moderating effect analysis shows that marketization and investor sentiment can positively moderate the relationship between the two. We complement and extend the existing literature.