Abstract
The world is pacing in digitalization first strategies but capital is not allocated to the right places. While a general expectation is that increased digitalization would be beneficial for efficient capital allocation, we argue that it might create a Financialization Overhang problem. Using a global panel dataset of 185 countries during the time period 1991-2024 and employing fixed-effects estimation technique with Driscoll-Kraay standard errors, we investigate the impact of digitalization on aggregate investment efficiency. We find consistent results that increased digitalization is associated with decline in investment efficiency. This finding remains robust after controlling for endogeneity via Difference-GMM estimations. The study suggests that digital dividends could be wasted in unproductive investment without better rules and oversight.