["Review of Development Economics, EarlyView. ", "\nABSTRACT\nThis study employs data from Chinese listed firms between 2011 and 2022 to examine the impact of financial misallocation on digital transformation. The empirical analysis adopts a two‐way fixed effects model, supplemented by instrumental variable techniques and multiple robustness checks to mitigate endogeneity concerns. The results show that financial misallocation traps firms in a “resource scarcity” dilemma, thereby reducing their willingness and capacity to pursue digital transformation. Specifically, financial misallocation curtails real investment and R&D expenditures, which in turn hinder the digital transformation process. Moreover, the negative effect is more pronounced for non‐state‐owned firms, high‐tech firms, and smaller firms relative to their state‐owned, non‐high‐tech, and large‐scale counterparts. Further analysis reveals that heightened economic policy uncertainty compels firms to accelerate digital transformation as an adaptive response. Overall, the research provides empirical evidence for accurately assessing the economic consequences of financial misallocation and for formulating differentiated financial policies to support firms' digital transformation.\n"]