Digital facade with crumbling analog foundation

Decoding Digital Transformation: Are Companies Just 'Digitwashing'?

Mira Elwood in Business & Economy August 2025 • 4 min read.

"New research reveals the gap between promises and actions in the digital world and what it means for investors."

Digital transformation has become the mantra of the modern business world. Companies across industries are touting their investments in technology, promising innovative solutions and improved performance. But what if the reality behind these pronouncements doesn't quite match the hype? What if some companies are merely 'digitwashing' – using buzzwords and superficial changes to appear digitally advanced without making substantial changes?

The concept of "digitwashing" refers to the gap between what companies say they are doing in terms of digital transformation (the 'words') and what they are actually doing (the 'deeds'). While digital transformation holds the promise of increased efficiency, innovation, and competitive advantage, a growing body of evidence suggests that not all companies are truly committed to this change. This discrepancy can have significant consequences, particularly for investors who may be misled by exaggerated claims.

A recent study sheds light on this critical issue, exploring the impact of the 'digital transformation gap' (DTG) on stock price crash risk. The research, which examined data from Chinese listed companies, reveals a surprising connection between a company's digital promises and its stock market performance. This article delves into the study's findings, exploring the potential causes and implications of digitwashing in today's business environment.

The Digital Transformation Gap: Words vs. Deeds

Digital facade with crumbling analog foundation

The study defines the Digital Transformation Gap (DTG) as the difference between a company’s digital transformation narrative in its official communications (primarily annual reports) and its actual investment in digital technologies. The researchers analyzed the frequency of digital-related keywords in company reports to quantify the 'words' aspect. They then compared this with actual investments in digital assets (software, technology infrastructure) to measure the 'deeds'.

This approach allowed the researchers to identify companies that were talking a big game about digital transformation but not backing it up with sufficient investment. The study revealed a significant prevalence of DTG among the companies analyzed, with many firms emphasizing digital transformation in their communications more than their actions warranted.

The study used the negative coefficient of skewness (NCSKEW) to measure the stock price crash risk.
Companies are 'talking' more about digital transformation than 'acting'.
Firms' perceptions of economic policy uncertainty significantly increase GDT.

The researchers hypothesized that this inconsistency between words and deeds could create a riskier environment for investors. When companies overstate their digital progress, they may attract investment based on unrealistic expectations. If the actual performance doesn't meet these expectations, it can lead to investor disappointment and potentially trigger a stock price crash.

The Future of Digital Transformation: Authenticity and Transparency

The findings of this study serve as a reminder to investors and business leaders alike: digital transformation is not just about adopting new technologies; it's about genuine commitment and strategic implementation. Transparency and authenticity are key. Companies that prioritize real investment and demonstrable results will be more likely to succeed in the long run, while those that engage in digitwashing risk alienating investors and damaging their reputation.

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2403.0136,

Title: "Digitwashing": The Gap Between Words And Deeds In Digital Transformation And Stock Price Crash Risk

Subject: q-fin.st econ.gn q-fin.ec

Authors: Shutter Zor

Published: 02-03-2024

Everything You Need To Know

What is 'digitwashing' and how does it relate to digital transformation?

Digitwashing refers to the discrepancy between a company's claims about its digital transformation efforts (the 'words') and its actual investments and actions (the 'deeds'). While Digital Transformation itself is the process of integrating digital technology into all areas of a business, fundamentally changing how you operate and deliver value to customers, digitwashing involves using the buzzwords and superficial changes to appear digitally advanced without making substantial, strategic changes. The Digital Transformation Gap (DTG) arises when companies overemphasize their digital progress without the backing of significant investment in digital assets like software and technology infrastructure. This can mislead investors into overvaluing the company's potential.

How did the study measure the Digital Transformation Gap (DTG) and what aspects were analyzed?

The study measured the Digital Transformation Gap (DTG) by analyzing the difference between a company's digital transformation narrative in its official communications, primarily annual reports, and its actual investment in digital technologies. The researchers quantified the 'words' aspect by examining the frequency of digital-related keywords in company reports. They then compared this with the 'deeds', which were measured by actual investments in digital assets like software and technology infrastructure. This allowed the researchers to identify companies that were talking about digital transformation but not backing it up with sufficient investment. The study revealed a significant prevalence of DTG among the companies analyzed.

What are the potential consequences of a company engaging in digitwashing?

Companies engaging in digitwashing risk several negative consequences. The primary concern is the potential for a stock price crash. When companies overstate their digital progress, they can attract investment based on unrealistic expectations. If the actual performance doesn't meet these expectations, investor disappointment and a subsequent stock price crash can occur. Additionally, digitwashing can damage a company's reputation and alienate investors who may lose trust in the company's leadership and strategic direction. Ultimately, it can undermine the company's long-term prospects and ability to compete in the market.

How can investors identify companies that might be engaging in digitwashing?

Investors can look for several red flags to identify companies that might be engaging in digitwashing. One crucial indicator is a significant Digital Transformation Gap (DTG), where a company's communication emphasizes digital initiatives more than its investment in digital assets like software and technology infrastructure. Investors should carefully analyze annual reports and other official communications for the frequency of digital-related buzzwords compared to the actual spending on digital technologies. Furthermore, the study mentioned Firms' perceptions of economic policy uncertainty significantly increase GDT. High Negative coefficient of skewness (NCSKEW) might be another indicator of increased stock price crash risk, thus warranting further investigation. In general, investors should prioritize transparency and authenticity and seek companies with a demonstrable commitment to digital transformation backed by tangible investments and results.

What role does authenticity and transparency play in successful digital transformation?

Authenticity and transparency are critical to the success of digital transformation. Companies that prioritize real investment in digital technologies and demonstrate tangible results are more likely to succeed in the long run. Authenticity means that a company's actions align with its stated goals and promises. Transparency involves providing clear, honest, and accurate information to investors and stakeholders about the company's digital transformation journey, investments, and progress. By focusing on these principles, companies can build trust with investors, avoid the risks associated with digitwashing, and create a sustainable path to digital transformation success. Without it the transformation remains just a buzzword or what the study refers to as a Digital Transformation Gap (DTG).