The dark side of digital transformation: Digital washing and accounting conservatism

Abstract

Current measurements of digital transformation primarily use context analysis methods, which have limitations in identifying the authenticity of corporate disclosures. Firms may selectively disclose and exaggerate their digital transformation progress, which we term digital washing. Previous studies have not examined digital washing's impact on accounting conservatism from a non-financial information disclosure perspective. Using data from Chinese listed firms during 2007–2022, we find that digital washing negatively affects accounting conservatism. However, this negative impact is mitigated by high analyst coverage, strong investor sentiment, and high executive compensation. These findings withstand several sensitivity testing, including alternative variable specifications. The main conclusions hold after addressing sample selection and endogeneity concerns through Propensity Score Matching (PSM) and instrumental variable approaches. State-owned enterprises, Big Four audited firms, and firms with low market competition have less negative impact of digital washing on accounting conservatism due to their political attributes, supervision intensity, and competitive pressure. This study provides insights for market investors in identifying digital washing behavior and enhancing market supervision.

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