Legitimacy, Efficiency and Uncertainty: Decoding the Financial Consequences of Common Prosperity on Digital Firms

Abstract

This study decodes the financial implications of China's common prosperity initiatives for digital firms through the integrated lenses of legitimacy theory, resource-based theory, and institutional theory. Using a panel dataset of 5,170 firm-year observations from 2011 to 2022, we find that firms' engagement in common prosperity initiatives presents a strategic puzzle. Our analysis reveals that secondary distribution (tax compliance) significantly enhances financial performance by bolstering corporate legitimacy within the institutional environment. Conversely, tertiary distribution (philanthropy) negatively affects short-term profitability, highlighting a trade-off with resource efficiency due to resource diversion. We further uncover the moderating role of internal capabilities and external conditions. R&D efficiency amplifies the financial returns from legitimacy-seeking tax contributions but diminishes returns from philanthropy, underscoring strategic trade-offs in resource allocation. Moreover, economic policy uncertainty (EPU) consistently attenuates the financial benefits of common prosperity engagement, demonstrating how policy instability undermines the value of social good initiatives. Theoretically, this study elucidates how digital firms navigate institutional pressures and resource constraints to balance legitimacy and efficiency. Practically, it suggests that policymakers should foster a stable and transparent policy environment with incentive-compatible mechanisms linking tax and innovation rewards to verified social contributions, while managers should integrate social initiatives with innovation strategies and adopt data-driven evaluation to achieve sustainable value creation.