The optimal distinctiveness literature emphasizes that firms are supposed to navigate the opposing pressures of competition and legitimacy to enhance their performance. Recent research have highlighted the importance of audience predispositions and their implications on the distinctiveness-performance relationship. Our study enriches this literature by exploring how investors’ risk-averse predispositions vary across two types of digital firms (born-digital firms versus non-born-digital firms), thereby different criteria of legitimacy assessments and variances on the distinctiveness-performance relationship. Specifically, born-digital firms (versus non-born-digital firms) face lower (versus higher) uncertainty in digital practices, thus appealing to strongly (versus weakly) risk-averse investors. When adopting distinctive digital practices, born-digital firms encounter substantial legitimacy penalties from strongly risk-aversion investors, yielding a U-shaped distinctiveness-firm performance relationship. In contrast, non-born-digital firms can sustain legitimacy from weakly risk-aversion investors when pursuing differentiating digital practices, leading to an inverse U-shaped distinctiveness-firm performance relationship. A sample of Chinese listed firms from 2007 to 2022 supported our arguments. These findings provide important theoretical and practical implications.
