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As a disruptive innovation, blockchain has the potential to force firms to restructure their business models in order to gain competitive advantages (Choudary et al., 2019). The early blockchain adopter, Walmart, announced a successful pilot for improving food traceability (Furlonger & Uzureau, 2019). More recently, Pfizer was involved in a large-scale blockchain project for a secure prescription drug track (MediLedger, 2020). The academic community also reflects an immense interest in blockchain technology. The extensive literature discusses a wide range of potential blockchain applications, including supply chain management (Babich & Hilary, 2020), multi-party data sharing (Wang et al., 2021), and counterfeit detection (Shen et al., 2021).
In light of the high academic and practitioner interest in blockchain, it is crucial to approach the question regarding the value of this technology. The most essential characteristic of blockchain technology is tamper resistance and traceability (Wang et al., 2021), which indicates firms have a strong ability to promote operational efficiency and social accountability, thus increasing companies’ profitability and enhancing debt creditors’ confidence in companies’ debt repayment ability. As a result, firms’ blockchain adoption could serve as strong indicators of default risk.
To examine the effect of blockchain adoption on firm default risk, we employ a large sample of public firms listed in China’s market between 2010 to 2021. Following Bharath and Shumway (2008), we use the expected default frequency to measure the corporate default risk and the number of blockchain-related words disclosed in the annual reports to measure the blockchain technology adoption. Our baseline results reveal a strong and negative association between blockchain adoption and firm default risk. In terms of economic significance, a one standard deviation increase in blockchain adoption is associated with a decrease in default risk of over 4.48% relative to the average level.
To establish causality, we first employ the average frequency of blockchain technology disclosure at the city level as an instrumental variable to alleviate the endogenous problems and then use the Heckman two-stage model to mitigate the concerns over selection bias. The results of these tests yield consistent findings with our baseline regression.
Additional robustness checks show that our results are consistent after replacing the independent variable with a dummy indicator, measuring the ex-post financial distress by the label of special treated (ST) firms, and further controlling for the jointly fixed effect of industry and year. These results collectively support our first hypothesis that blockchain adoption can reduce corporate default risk.
In further tests, we find that the adoption of blockchain technology is a positive signal and beneficial to the transparency and operating process optimization of firms. First, the disclosure of blockchain adoption can signal to the market and lead to positive evaluation of media. Second, blockchain adoption can strengthen the trust between participants in the supply chain and the suppliers are willing to provide more trade credit. Furthermore, the resource allocation efficiency and internal control quality are improved, leading to higher management efficiency and disclosure quality. These results reveal the key mechanisms through which blockchain adoption decreases the possibility of corporate default.