The mediating effect test.

The COVID-19 pandemic has drawn attention to the strategic responses of Chinese firms on digital transformation and led to a call for enhancing competitive advantage via accelerating digital transformation. Besides the physical health issue, the pandemic has triggered an extraordinary social and economic crisis in which service industries have been attacked hard. In this situation, firms are meeting increasing competitive pressure, which urges them to achieve better performance with the help of digital transformation. Based on the technology-organization-environment framework and dynamic capabilities theory, this research proposed two studies with two methods, including a structural equation model and a regression discontinuity design with a fixed-effect model. The findings suggest digital transformation mediates the relationship between competitive pressure and firm performance among Chinese small- and medium-sized enterprises and large firms after the outbreak of COVID-19, respectively. It confirms that digital transformation is a practical strategic decision for Chinese service firms to respond to increasing competitive pressure in the COVID-19 pandemic. Besides, the results also illustrate the moderating effects of absorptive, innovative, and adaptive capability on the relationship between digital transformation and firm performance among large firms.