Does the market reward digitalization efforts? Evidence from securities analysts’ investment recommendations

The size and pace of the digital transformation make investments in digitalization for firms of all sizes and in all industries inevitable. Besides the potential tremendous advantages arising from the application and consideration of newly available technologies, these investments are inherently associated with a high level of uncertainty. While costs being substantial, the benefits might not accrue within the near future or at all. The technological change literature has explored the reactions of incumbent firms and their ability to adapt during times of technological transformation; however, very few studies within this stream have considered external factors, such as the potential pressure arising from securities analysts, who fulfill an information brokerage function for investors. Previous findings portray analysts as opponents of cash consuming investments, such as firms’ adaptations to technological change. We enlarge this view by arguing that analysts are biased towards status quo-preserving technologies only until external pressure occurs, which is impactful enough to change their inertial assessments. We hence hypothesize that in the digital age, analysts’ reactions to firms’ digitalization efforts become increasingly less unfavorable. Since no industry is impervious to these changes, we use a large sample of publicly traded German firms over 12 years and find empirical evidence for our hypotheses. Ultimately, analysts even reward firms that proactively responded to these challenges. This work contributes to research on analysts, technological change, and firms’ strategic choices. Our study offers a novel approach to measure firms’ digitalization efforts as well as insights for managers who react upon new technologies.