Digital transformation and financial reporting quality in emerging markets: mediating role of entrepreneurial ecosystem in the Palestinian insurance sector

The global insurance industry has undergone a profound transformation driven by rapid digitalization, intensifying globalization, and evolving business models (Bhimani and Willcocks, 2014; Schmit et al., 2017). Digital technologies are becoming more integrated into accounting and reporting systems, transforming the processes of generating, validating, and disclosing financial information (Keramati et al., 2021). Many studies assume stable institutions, mature regulations, and high digital readiness, which neglect the diverse conditions that influence digital transformation. This implicit assumption limits our understanding of whether digitalization produces comparable governance and reporting gains in fragile and conflict-affected economies.

The Palestinian insurance sector is a vital yet understudied area. Operating in a politically constrained and fragile institutional setting, it plays a key role in maintaining financial stability alongside the banking and judicial systems. Since the Palestinian Capital Market Authority (PCMA) was established and the Insurance Law was implemented in 2005, regulatory frameworks have improved (PCMA, 2024a, b). However, ongoing structural uncertainties, inadequate digital infrastructure, and a weak insurance culture still hinder sector growth (Elrefae et al., 2024). These features make Palestine a unique case for exploring how digital transformation interacts with institutional instability. Whether digital tools can significantly improve financial reporting quality in such a context remains uncertain and has yet to be thoroughly examined.

Emerging technologies, including big data analytics, artificial intelligence, robotic process automation (RPA), and blockchain, offer mechanisms to improve reporting accuracy, traceability, standardization, and timeliness (Warren et al., 2015; Ghasemi et al., 2019; Kaya and Akbulut, 2018). Empirical evidence from relatively stable emerging and developed markets documents positive associations between digitalization and financial reporting quality. Yet, these studies largely overlook institutional fragility as a boundary condition. In environments with structural constraints, digital technologies can either support existing institutional strength or fill institutional gaps, resulting in uneven governance outcomes.

In contexts characterized by regulatory gaps, infrastructure constraints, and governance asymmetries, digital tools may function differently, either compensating for institutional weaknesses or failing to deliver expected reporting improvements. This tension exposes a clear research gap. Although digital accounting and transformation research has expanded considerably (Bhimani, 2021; El-Haddadeh et al., 2021), limited empirical attention has been given to how digital technologies interact with weak entrepreneurial ecosystems and fragmented institutional structures to shape financial reporting outcomes. Existing studies often conceptualize digital transformation as a direct and universal driver of reporting quality, without examining contextual mechanisms that may mediate, amplify, or constrain this relationship (Ghasemi and Razak, 2022). As a result, the literature is mostly focused on associations and lacks explanations based on mechanisms, especially in fragile and conflict-affected settings.

Addressing this gap is both theoretically and practically significant. Theoretically, the study advances digital accounting research by examining whether digital transformation acts as a substitutive governance mechanism that compensates for institutional fragility, or whether its effectiveness depends on the strength and maturity of the entrepreneurial ecosystem (Pham and Vu, 2022; Elia et al., 2022). This view repositions digital transformation using a contingency-based theoretical approach instead of a deterministic one. By integrating digital transformation scholarship with institutional and ecosystem perspectives (Bhimani, 2021; El-Haddadeh et al., 2021), the study moves beyond descriptive associations toward identifying contextualized causal mechanisms.

Practically, the issue is equally pressing. For policymakers and regulators in fragile financial systems, investing in digital transformation is often viewed as a modernization strategy. However, without understanding whether ecosystem conditions enable or constrain reporting gains, such investments may produce uneven or suboptimal outcomes (World Bank, 2023a, b). This highlights important policy issues related to how digital investments are prioritized and coordinated with the development of institutions and ecosystems (UNCTAD, 2023). Empirical evidence from Palestine, therefore, offers actionable insights for similar conflict-affected and emerging economies.

To address these concerns, this study proposes and tests a conceptual model linking digital technology, the entrepreneurial ecosystem, and financial reporting quality. Digital technology is conceptualized as the integrated deployment of hardware and software systems that facilitate data input, processing, and dissemination to enhance operational and decision-making efficiency (Hertati and Zarkasyi, 2015; Barykin et al., 2020). Financial reporting quality refers to the extent to which financial information is accurate, reliable, and decision-useful in enabling stakeholders to evaluate performance and predict future cash flows (Hasan, 2023). The entrepreneurial ecosystem comprises interconnected institutions, policies, markets, and actors that collectively support innovation and coordinated economic activity (Balawi and Ayoub, 2022).

Unlike prior studies that examine these constructs in isolation, this research explicitly tests whether the entrepreneurial ecosystem mediates the relationship between digital technology and financial reporting quality. This mediation perspective allows the study to explore the fundamental processes connecting technological adoption with governance outcomes. In doing so, it shifts the analytical focus from assuming a universal digital effect to evaluating a theoretically grounded contextual mechanism.

Accordingly, the central research question is: How does the adoption of digital technology influence financial reporting quality in Palestinian insurance companies, considering its contribution to the entrepreneurial ecosystem and the ecosystem's potential mediating role in this relationship?

By empirically examining Palestinian insurance companies and focusing on four core dimensions of reporting quality, accuracy, transparency, consistency, and timeliness, this study contributes a context-sensitive model that integrates digital transformation, ecosystem dynamics, and governance outcomes. In doing so, it addresses a critical gap in the literature: the absence of empirically grounded, mechanism-based explanations of how digital transformation affects financial reporting quality in fragile and conflict-affected financial systems.

The Palestinian insurance sector has experienced steady growth despite ongoing political and economic challenges, playing a vital role in maintaining financial stability alongside banking and judicial systems. Improving product variety and expanding claims are crucial for reducing financial risks (Abdeljawad and Dwaikat, 2022), and the sector also helps buffer systemic shocks in a volatile political environment (World Bank, 2022).

Reforms such as the establishment of the Palestinian Capital Market Authority (PCMA) and the Palestinian Insurance Federation (PIF) have strengthened governance frameworks (PCMA, 2024a, b). As shown in Table 1, between 2019 and 2023, financial and insurance activities grew from USD 632.2 million to USD 748.8 million, with insurance revenues increasing from 4% to 5.1% of GDP, highlighting their growing economic importance.

Despite these developments, structural vulnerabilities, infrastructure gaps, and limited digital sophistication continue to hinder sectoral transformation. These issues are common in emerging markets, where digital progress is often slowed by weak institutional capacity and low ICT investment (El-Haddadeh et al., 2021). The Palestinian case is particularly extreme, raising questions about whether digital technologies can improve reporting quality without a fully developed entrepreneurial ecosystem.

The eight insurance companies listed on the Palestine Exchange (PEX) offer a unique, census-based setting to explore this question in an environment of institutional fragility. While digital technology has improved financial reporting quality worldwide (Warren et al., 2015; Ghasemi et al., 2019), such improvements generally depend on stable institutions, which are often lacking in conflict-affected economies (Alonge et al., 2024). Therefore, understanding whether digital transformation directly enhances reporting quality in fragile contexts or relies on ecosystem conditions remains a critical question this study aims to answer.

Digital transformation is increasingly recognized not merely as a process of technological modernization but as a structural reconfiguration of organizational governance processes. More specifically, digital technologies incorporate rule-based, algorithmic, and traceable controls that shape accountability and monitoring systems within companies. Within financial reporting systems, digital technologies, including cloud accounting, enterprise resource planning (ERP), data analytics, blockchain, and automated reporting platforms, redefine how financial information is generated, verified, and disclosed (Bhimani, 2021; El-Haddadeh et al., 2021). These technologies enhance data integration, reduce manual intervention, and strengthen traceability, thereby potentially improving reporting quality.

Institutional theory provides a powerful lens for understanding this transformation. Organizations operate within regulatory, normative, and cognitive institutional structures that shape their strategic responses. Firms adopt technological systems not solely for efficiency gains but also to enhance legitimacy, comply with regulatory expectations, and align with industry norms (Fuentelsaz et al., 2023). Therefore, digital transformation can be understood not only as a tool for operational efficiency but also as a strategic mechanism for achieving institutional legitimacy. In highly regulated sectors such as insurance, financial reporting quality represents a core legitimacy mechanism, as stakeholders rely on transparent disclosures to assess solvency, risk exposure, and governance integrity (Jawad and Ayyash, 2019).

The success of digital transformation hinges on the institutional environment. In stable economies, digital technologies tend to reinforce existing governance frameworks. Conversely, in fragile or conflict-affected areas characterized by regulatory fragmentation and limited oversight, digital transformation may either mitigate institutional weaknesses through automated controls or struggle due to ecosystem limitations (Almaleeh, 2021).

Recent research demonstrates a positive link between digital transformation and improved accounting information quality in emerging markets (Al-Htaybat et al., 2025; Amoako et al., 2025; Zhang et al., 2025). Likewise, Al-Najjar et al. (2025) found that digital transformation enhances accounting systems in public sector institutions across the MENA region. Nonetheless, these studies generally assume well-functioning institutional infrastructures and place limited focus on fragile institutional contexts. This research fills that gap by conceptualizing digital transformation as an embedded governance mechanism within institutions, influenced by the surrounding entrepreneurial ecosystem.

Financial reporting quality encompasses the accuracy, reliability, transparency, and timeliness of financial disclosures and reflects key attributes such as accrual quality, earnings persistence, and value relevance, as discussed in the literature (Dechow and Dichev, 2002; Francis et al., 2004; Barth et al., 2008). High-quality reports help reduce information asymmetry, boost investor confidence, and ensure regulatory compliance (IFRS Foundation, 2023; Zhao et al., 2023). From an institutional perspective, reporting systems serve as formal governance mechanisms that demonstrate adherence to legal and normative standards.

Digital technologies can enhance reporting quality through various institutional channels. Automation helps reduce discretionary manipulation by limiting manual processes. Integrated systems improve internal controls via audit trails and real-time monitoring (Jabor and Hamdan, 2023). Standardized digital platforms ensure consistency and comparability across periods. Advanced data validation and analytics support ongoing audits and early error detection, thereby strengthening the accuracy and reliability of disclosures.

Bhiman (2021) states that digitalization fundamentally transforms accounting control systems by incorporating algorithmic governance. Likewise, IFAC (2023) emphasizes that digital reporting infrastructure fosters greater transparency and regulatory oversight. Empirical studies confirm that digital transformation reduces reporting distortions and promotes disclosure consistency (Al-Htaybat et al., 2025; Amoako et al., 2025; Zhang et al., 2022).

Nonetheless, institutional theory indicates that technological adoption alone does not automatically improve governance; its effectiveness depends on the strength of enforcement, regulatory consistency, and organizational capabilities. In weak regulatory environments, poor enforcement can limit the disciplining impact of digital systems. Conversely, digital tools may compensate for institutional weaknesses by embedding standardized procedures that reduce reliance on external oversight.

In the Palestinian insurance sector, marked by political instability, limited regulatory capacity, and infrastructural challenges, digital technologies could serve as governance substitutes. By decreasing human discretion and increasing transparency, they may enhance the quality of financial reporting even without robust external enforcement (Alhawtmeh, 2023).

Accordingly,

Institutional theory highlights that organizations are embedded within larger socio-economic systems. Technological change results not only from firm capabilities but also from conditions at the ecosystem level. The entrepreneurial ecosystem includes interconnected actors such as regulators, financial institutions, digital service providers, universities, and policymakers, whose interactions influence the diffusion of innovation (Balawi and Ayoub, 2022; Stam and Van de Ven, 2021). The maturity of an ecosystem affects access to digital infrastructure, skilled labor, clear regulations, and funding options. Kantis et al. (2025) find that digital transformation in emerging economies depends on institutional complementarities and effective ecosystem coordination. Similarly, Al-Najjar et al. (2025) note that successful digitalization in the public sector of MENA countries relies on institutional preparedness and aligned policies (Rammal et al., 2023). Digital transformation can also drive ecosystem development: as firms implement digital systems, demand for specialized expertise, regulatory updates, and infrastructure improvements grows. This creates a co-evolutionary cycle in which firm-level digital adoption and ecosystem growth mutually reinforce one another, potentially leading to knowledge sharing, institutional reforms, and better coordination among ecosystem players. In fragile economies, this reciprocal process is especially important. For example, digital adoption in the insurance sector may strengthen the ecosystem by encouraging regulatory reforms, increasing digital literacy, and fostering collaboration between the public and private sectors.

Consequently,

A well-established entrepreneurial ecosystem enhances institutional coherence and governance by providing essential resources such as access to capital, clear regulations, technological infrastructure, and expert knowledge (Koch et al., 2022; Giones et al., 2022). These resources facilitate the development of effective reporting systems and ensure regulatory compliance (PwC, 2023).

From an institutional perspective, mature ecosystems strengthen regulatory and normative influences that foster transparency, while coordinated actors enhance the credibility and comparability of financial disclosures. Kantis et al. (2025) suggest that ecosystem strength influences the effects of digital transformation, especially in emerging markets (Hamdan and Elrayah, 2023).

In the realm of financial reporting, strong ecosystems improve interoperability, standardization, and enforcement, whereas weaker ecosystems limit the success of digital initiatives. Therefore, the entrepreneurial ecosystem acts as a vital institutional facilitator of reporting quality.

However,

While prior research documents direct effects of digital transformation on reporting quality (Al-Htaybat et al., 2025; Amoako et al., 2025), limited attention has been given to the institutional mechanisms through which these effects occur. Institutional theory suggests that technological innovations generate sustained improvements in governance when embedded in supportive regulatory and normative environments.

The entrepreneurial ecosystem may therefore act as a mediating institutional layer. Digital transformation may first enhance ecosystem coherence—through knowledge spillovers, regulatory modernization, and infrastructural investment—which in turn improves reporting quality. In fragile economies, this mediation mechanism may be particularly critical, as ecosystem constraints can either amplify or dampen technological benefits.

Autio et al. (2023) and Kantis et al. (2025) emphasize that ecosystem maturity shapes how digital technologies translate into organizational performance outcomes. Extending this logic to financial reporting, this study proposes that ecosystem strength channels the impact of digital adoption toward governance improvements.

Accordingly,

As previously stated, the framework conceptualizes digital transformation as a governance mechanism deeply embedded within institutions. Its influence on the quality of financial reporting is both direct (H1) and indirect, operating through the entrepreneurial ecosystem (H2, H3, H4). This model situates these relationships within the broader context of institutional fragility, which shapes the effectiveness and manifestation of digital and ecosystem dynamics.

This framework advances theory by combining institutional theory and entrepreneurial ecosystem perspectives to view digital transformation as a governance mechanism rather than merely a technological upgrade. It presents a multi-level, context-aware model where ecosystem embeddedness influences how digital adoption affects financial reporting quality. Focusing on a conflict-affected context, the study identifies the limits of digital effectiveness and emphasizes the dependence of governance outcomes on fragile economies.

This study employs a quantitative approach using partial least squares structural equation modeling (PLS-SEM) to examine the relationships among digital technology, the entrepreneurial ecosystem, and financial reporting quality (FRQ). PLS-SEM is well-suited for complex models involving mediation and hierarchical structures, especially when variables are measured in both formative and reflective modes (Hair et al., 2021). As a variance-based method, it emphasizes maximizing explained variance (R²) and can accommodate non-normal data distributions (Sarstedt et al., 2022; Rigdon et al., 2023). It is particularly suitable for emerging markets with small sample sizes and limited populations, as well as for predictive and mediation-focused studies involving latent constructs like ecosystem quality (Hair et al., 2023; Cepeda-Carrion et al., 2022; Lee and Cho, 2022). Therefore, PLS-SEM provides a robust framework for examining both direct and indirect effects of digital technology on FRQ.

To improve the reliability and objectivity of the study results, annual secondary data from the audited financial reports of eight insurance companies listed on the Palestine Exchange (PEX) for 2019–2023 were used instead of primary data, as higher-frequency data are not available in Palestine.

The dataset, therefore, consists of 40 firm-year observations. All data were obtained from publicly available financial disclosures on the PEX website. The data and preliminary analyses are drawn from Alsarkhi (2025), a master's thesis conducted under my supervision, with the author serving as a co-author of this study. The authors extended this work by integrating a broader theoretical framework, updating the literature (2023–2025), conducting advanced analyses, clarifying methods, and strengthening the conceptual and policy focus, resulting in the present manuscript.

Although the number of firms is limited, the sample represents the full population of insurance companies listed on the Palestine Exchange during the study period. Thus, the study adopts a census-based design rather than a sampling approach, eliminating sampling bias within the defined sector.

The census-based approach enhances internal validity by removing sampling bias, but it may limit external generalizability outside the particular institutional setting. The use of panel data enhances analytical robustness by incorporating both cross-sectional and temporal variation (Baltagi, 2021). Given the narrow sectoral boundary and institutional context, the dataset is appropriate for variance-based structural modeling.

While binary indicators effectively capture observable adoption, they may underrepresent differences in the depth, sophistication, and intensity of digital implementation across firms. This study examines three latent constructs: Digital Technology, Entrepreneurial Ecosystem, and Financial Reporting Quality (FRQ).

While firm-level and governance variables, such as firm size, leverage, profitability, audit features, and board structure, are often included in FRQ research, this study intentionally omits them for specific contextual and methodological reasons. Existing research suggests that reporting quality is mainly influenced by institutional, technological, and ecosystem factors rather than firm-specific traits (Al-Shammari and Al-Sultan, 2023; Al-Htaybat et al., 2025; Amoako et al., 2025; Krahel and Titera, 2022), especially in Palestine (Alsarkhi, 2025). According to PLS-SEM guidelines (Hair et al., 2021, 2023), excluding these variables improves model simplicity and stability. The small sample (n = 40) is justified as a complete census of the population, and PLS-SEM is appropriate for such small samples (Hair et al., 2023). Consequently, the study relies on secondary data to minimize respondent bias and ensure the results are more reliable and objective.

All constructs are modeled as composite constructs consistent with PLS-SEM guidelines (Hair et al., 2023).

Digital technology adoption (DT adoption) is a composite construct that reflects firms' engagement with key innovations such as Big Data Analytics (BDA), Artificial Intelligence (AI), and Blockchain Technology (BLC) (Nugroho et al., 2023). Each component is measured using a binary indicator (1 = adoption; 0 = non-adoption) based on information from annual reports. This approach recognizes that BDA, AI, and BLC are distinct yet complementary aspects of digital capability, and variation in any one contributes to the overall adoption index. This index captures a firm's digital intensity and breadth of integration, highlighting the multifaceted nature of digital transformation and its role in enhancing innovation and competitive positioning.

FRQ is operationalized as a multidimensional composite construct capturing four dimensions:

1. Accuracy (ACC): Measured using a structured five-point index reflecting reconciliation practices, internal control disclosures, and audit adjustments.

2. Consistency (CON): Measured by the standardization of accounting procedures and continuity in reporting practices.

3. Timeliness (TIM): Measured by the number of days between fiscal year-end and publication of financial statements.

4. Transparency (TRA): Assessed through disclosure clarity, adherence to standards, and digital disclosure practices.

ACC, CON, and TRA dimensions are scored on structured five-point indices derived from observable reporting practices, while timeliness is measured as a continuous numerical variable. FRQ is modeled as a higher-order composite construct formed by its four dimensions, consistent with multidimensional reporting quality frameworks (Hail et al., 2022; Al-Shammari and Al-Sultan, 2023).

The entrepreneurial ecosystem is redefined as a firm-level construct of embeddedness that captures the extent to which a company is institutionally connected to and supported by external innovation and regulatory networks (Makkawi and Saadedin, 2021). Rather than relying on two isolated binary indicators, the construct is modeled as a composite index consisting of:

1. Collaborative Infrastructure (CI): Binary composite indicator capturing (1) formal external partnerships and (2) board/executive oversight of digital transformation initiatives (1 = present; 0 = absent).

2. Innovation Policies (IP): Binary composite indicator reflecting (1) the existence of structured digital innovation programs and (2) disclosure of regulatory alignment or compliance modernization (1 = present; 0 = absent).

These four indicators collectively capture ecosystem embeddedness, institutional coordination, and innovation orientation (Smith, 2018). The construct is modeled formatively, reflecting the degree of ecosystem maturity surrounding the firm. This operationalization aligns with ecosystem capability frameworks linking collaboration, governance integration, and institutional alignment to performance outcomes (Autio et al., 2023).

The hypothesized relationships were tested using variance-based structural equation modeling (PLS-SEM) in SmartPLS, which is well suited to the study's predictive orientation, model complexity, and small sample size. Following Hair et al. (2023), the analysis followed a two-stage procedure. The measurement model was evaluated for construct reliability and validity. Internal consistency was assessed using Cronbach's alpha and composite reliability (CR), with values considered acceptable as shown in Table 3. Convergent validity was established with average variance extracted (AVE) values above 0.50, and discriminant validity was assessed using the Fornell–Larcker criterion and the HTMT ratio, with values below 0.90 (Henseler et al., 2022). Multicollinearity was assessed using variance inflation factors (VIF) with conservative cutoffs (Hair et al., 2023).

After validating the measurement model, the structural model was evaluated. Path coefficients were estimated using nonparametric bootstrapping with 5,000 resamples to obtain robust standard errors and t-statistics. Model explanatory power was measured using coefficients of determination (R²) for endogenous constructs (Hair et al., 2023). Effect sizes (f²) indicated the contribution of exogenous constructs to endogenous variance, and predictive relevance was assessed via blindfolding to compute Stone–Geisser's Q², with positive values confirming the model's predictive validity (Hair et al., 2023; Henseler et al., 2022).

This study exclusively uses publicly accessible secondary data. No confidential or proprietary information is involved. All sources are appropriately cited. The research adheres to transparency, replicability, and academic integrity standards recommended by the Committee on Publication Ethics (COPE, 2022).

This study acknowledges several limitations. First, key constructs, such as digital technology adoption and ecosystem embeddedness, are measured with binary indicators, which may reduce variance and sensitivity to differences across firms. Second, the study uses a small sample (N = 8 firms; 40 firm-year observations). Although PLS-SEM is suitable for small samples, the limited statistical power requires cautious interpretation. Third, the research design is associative rather than causal, meaning that while structural relationships can be identified, definitive causal inference is not possible. Findings should be viewed as supported associations within a specific context rather than universal causal claims.

This section presents the empirical findings derived from the Partial Least Squares Structural Equation Modeling (PLS-SEM) analysis. The results offer insight into the direct and indirect relationships among Digital Technology (DT), the Entrepreneurial Ecosystem (EE), and Financial Reporting Quality (FRQ) in Palestinian insurance companies. Each relationship is evaluated based on statistical significance, strength of association, and variance explained, as summarized in Tables 2–6 and Figures 1 and 2.

Table 2 illustrates the structural relationships and their corresponding path coefficients, t-statistics, p-values, and 95% confidence intervals. The path from DT to FRQ is both strong and statistically significant (β = 1.471, t = 4.695, p < 0.001), indicating that digital technologies have a positive impact on financial reporting outcomes, including accuracy, consistency, transparency, and timeliness. However, path coefficients greater than 1 (β = 1.471) can appear in PLS-SEM due to suppression effects, especially with small samples. As a result, this finding should be interpreted with caution and considered alongside assessments of collinearity and discriminant validity (Hair et al., 2023). This supports Hypothesis H1. The model explains 35.5% of the variance in FRQ (R² = 0.355; adjusted R² = 0.320), indicating moderate explanatory power for the combined effects of DT and EE.

The second significant relationship, DT → EE (β = 0.724, t = 6.583, p < 0.001), indicates that the adoption of digital technology promotes ecosystem development, including innovation programs and external collaborations. This supports Hypothesis H2. The associated R² value of 0.455 (adjusted R² = 0.440) reflects a moderate level of variance explained in the entrepreneurial ecosystem construct.

In contrast, the relationship from EE to FRQ is statistically insignificant (β = −0.261, t = 0.585, p = 0.559), and the confidence interval crosses zero ([−1.180, 0.610]), as shown in Table 2. These results do not support Hypothesis H3, indicating that although the ecosystem may evolve due to DT, it currently does not exert a measurable direct influence on financial reporting quality.

Reliability and validity results are presented in Table 3. The Composite Reliability (CR) values for DT (0.755) and FRQ (0.788) are acceptable, but EE remains weak (CR = 0.658). Similarly, Cronbach's Alpha scores are below the acceptable threshold (DT = 0.586; EE = 0.365; FRQ = 0.591), raising concerns about internal consistency, especially for the EE construct.

Despite this, all constructs meet the criteria for convergent validity (AVE >0.50), with EE (AVE = 0.541), DT (AVE = 0.525), and FRQ (AVE = 0.624). However, discriminant validity assessment via HTMT reveals an issue: the HTMT ratio for DT–EE exceeds the threshold (HTMT = 1.287), as shown in Table 3, suggesting conceptual overlap between the two constructs that warrants future refinement. Although the HTMT value exceeds the recommended threshold, slight violations may be acceptable in exploratory PLS-SEM models when constructs are theoretically related (Hair et al., 2023). Additionally, the low Cronbach's alpha (α = 0.365) reflects the formative and multidimensional nature of the construct; as noted by Hair et al. (2023), internal consistency measures are less appropriate in such cases.

Figure 1 below illustrates the structural path model estimated using the bootstrapping procedure in PLS-SEM. The model explores the relationships among Digital Technology (DT), Entrepreneurial Ecosystem (EE), and Financial Reporting Quality (FRQ). The latent construct “Digital Technology” is measured by three indicators: AI, BDA, and BLC, with standardized loadings of 0.880, NaN, and 0.734, respectively. The undefined loading for BDA suggests a potential estimation issue and may require model refinement.

The path from Digital Technology to Entrepreneurial Ecosystem is strong and statistically significant (β = 0.555, p < 0.001), suggesting that digital advancements in AI and blockchain are key enablers of ecosystem development. Likewise, Digital Technology has a significant direct effect on Financial Reporting Quality (β = 0.559, p < 0.001), confirming its pivotal role in enhancing accuracy, consistency, and transparency in financial disclosures.

However, the Entrepreneurial Ecosystem does not significantly influence Financial Reporting Quality, indicating a lack of alignment between innovation-oriented institutions and reporting practices. The model explains 45.5% of the variance in EE and 35.5% in FRQ, indicating moderate explanatory power. These findings underscore the enabling role of digital technologies while revealing a potential disconnect between ecosystem vitality and governance systems.

Figure 2 below presents the same structural model evaluated using PLS-SEM, with updated path coefficients and loadings. Digital Technology continues to be operationalized through AI (0.824), BDA (0.432), and BLC (0.842), while Financial Reporting Quality is measured by Accuracy (0.853), Consistency (0.897), Timeliness (−0.315), and Transparency (0.929). The Entrepreneurial Ecosystem is reflected in two dimensions: Collaborative Infrastructure (CI = 0.979) and Innovation Policies (IP = 0.350).

The structural path from Digital Technology to Entrepreneurial Ecosystem remains positive and moderately strong (β = 0.724), reinforcing the finding that digital tools contribute to the vibrancy of innovation ecosystems. Furthermore, the direct path from DT to FRQ is substantial (β = 1.471), suggesting that technological infrastructure is a dominant determinant of reporting practices in the sector. Notably, the path from Entrepreneurial Ecosystem to Financial Reporting Quality is negative (β = −0.261), indicating a potential misalignment or institutional friction between innovation environments and formal reporting protocols.

The explained variance remains stable, with R² values of 0.455 for EE and 0.355 for FRQ, confirming the robustness of the model. However, the inverse relationship between EE and FRQ may reflect structural rigidity or gaps between policy and practice in the local entrepreneurial ecosystem.

The mediation analysis in Table 4 further corroborates these results. The specific indirect effect of DT on FRQ through EE is negative and not statistically significant (β = −0.189), suggesting that the entrepreneurial ecosystem does not mediate this relationship, thereby refuting Hypothesis H4. This non-significant mediation indicates that the ecosystem currently does not facilitate digital effects on FRQ, pointing to limited institutional alignment rather than weaknesses in the model.

The total effect of DT on FRQ (β = 1.282) remains strongly positive and statistically significant, emphasizing the key role of digital technologies in enhancing reporting quality, even without mediation. This supports the main conclusion that digital transformation directly improves financial reporting quality within the sector.

Table 5 presents effect sizes to evaluate the substantive contribution of each predictor. The effect of DT on FRQ shows a large effect size (f² > 0.35), consistent with its strong path coefficient and statistical significance. Similarly, DT's effect on EE shows a large effect size, supported by EE's high R² (0.455). In contrast, the effect of EE on FRQ is negligible (f² < 0.02), consistent with its statistical insignificance.

Predictive relevance (Q²), assessed via blindfolding, yielded positive Q² values for both endogenous constructs (FRQ and EE), indicating satisfactory out-of-sample predictive capability.

Furthermore, robustness checks were conducted given the limited sample size (N = 40 firm-year observations). The procedures comprised the following: First, bootstrapping with 5,000 resamples was used to assess the stability of the path estimates. Results consistently showed the same direction and significance. Second, multicollinearity was assessed using VIF values, all of which remained well below the critical thresholds, indicating no concerns. Third, predictive relevance (Q²) was examined, confirming the model's predictive capability despite the constrained sample size. Fourth, re-estimating the model by excluding single-year observations did not materially change the direction of the paths, suggesting temporal stability. Taken together, these robustness checks enhance confidence in the structural findings, though caution is warranted given the small-N census design.

As shown in Table 6, hypotheses H1 and H2 are supported, while H3 and H4 are not. The results emphasize the significant role of digital technology in enhancing financial reporting quality and developing entrepreneurial ecosystems. However, the direct and mediating effects of the ecosystem are limited, indicating a need for better structural and regulatory alignment.

Examination of evidence from Table 2, Table 4, and Figures 1–2 confirms that DT significantly impacts both FRQ and EE. Conversely, EE does not significantly influence or mediate FRQ, pointing to a lack of structural alignment. Overall, digital technology is identified as the main driver of financial reporting quality in the Palestinian insurance sector, highlighting notable gaps in how the ecosystem contributes to governance.

This study examined the structural relationships among digital technology (DT), the entrepreneurial ecosystem (EE), and financial reporting quality (FRQ) in Palestinian insurance companies. The findings offer theoretically robust, contextually grounded insights into how digital transformation influences accounting quality in emerging, institutionally constrained environments. Overall, the findings suggest that digital transformation serves as an institutional substitute rather than a complement in fragile environments.

Digital Technology and Financial Reporting Quality: The findings demonstrate a clear, statistically significant positive association between digital technology and financial reporting quality. This supports the idea that digital transformation directly improves key qualitative aspects of financial data, such as accuracy, transparency, consistency, and timeliness, which are widely recognized as fundamental in research on financial reporting quality (Dechow and Dichev, 2002; Francis et al., 2004; Barth et al., 2008). The evidence aligns with recent empirical research showing that digitalization strengthens accounting information quality and disclosure transparency in emerging markets (Al-Htaybat et al., 2025; Amoako et al., 2025; Zhang et al., 2025). Specifically, Al-Htaybat et al. (2025) show that digital transformation improves accounting systems by integrating data and automating processes, thereby reducing information asymmetry. Similarly, Amoako et al. (2025) document a positive association between digitalization and FRQ across Sub-Saharan Africa, while Zhang et al. (2025) confirm improved transparency among listed firms in emerging markets. The present findings reinforce this evidence in the Palestinian insurance sector. The strong DT–FRQ effect suggests that digitalization functions as a governance-enabling infrastructure rather than merely a technological upgrade. In fragile contexts, digital systems help offset regulatory weaknesses through standardized controls, automated validation, and real-time verification, consistent with Al-Najjar et al. (2025), who demonstrate improvements in accounting systems through formalized reporting and compliance mechanisms in MENA public institutions.

Digital Technology and the Entrepreneurial Ecosystem: The results also show a strong positive effect of digital technology on the entrepreneurial ecosystem. This aligns with Kantis et al. (2025), who argue that digital transformation drives ecosystem development through institutional complementarities and coordination. In the Palestinian insurance sector, digital adoption enhances communication, data sharing, and service innovation, indicating that digital transformation strengthens both firm-level reporting systems and broader ecosystem interactions.

The Non-Significant Role of the Entrepreneurial Ecosystem in Financial Reporting Quality: The entrepreneurial ecosystem has no significant direct effect on FRQ and does not mediate the DT–FRQ relationship. This finding refines ecosystem theory by suggesting that its impact depends on the degree of institutional embedding. As noted by Kantis et al. (2025), ecosystem effectiveness requires alignment with regulatory and innovation systems, which remain limited in the Palestinian context. Consequently, ecosystem activity alone does not translate into improved accounting transparency without strong professional and regulatory support.

Overall, the results reveal a hierarchical structure: digital technology directly improves FRQ and strengthens the ecosystem, while the ecosystem does not independently enhance reporting quality. This indicates that digital transformation currently functions as a substitute for institutional weakness rather than an ecosystem-amplified mechanism in this context, offering a more nuanced view of digital transformation in fragile economies.

The study shows that digital transformation alone can enhance governance outcomes even without robust ecosystem support, highlighting its role as a compensatory institutional mechanism. The findings demonstrate that digital technology is a leading driver of improved financial reporting quality among Palestinian insurance firms. Notable improvements in transparency, accuracy, and timeliness of reports have been achieved through digital transformation (OECD, 2022). Furthermore, this shift significantly contributes to fostering the growth of an entrepreneurial ecosystem within the sector (OECD, 2021).

However, the entrepreneurial ecosystem itself does not directly influence the quality of financial reporting and does not mediate the relationship between digital technology and reporting quality (Yusran, 2023). These insights suggest that while a vibrant entrepreneurial ecosystem can promote innovation and foster collaborative efforts, its effectiveness in governing financial reporting is heavily contingent on stronger institutional integration and regulatory frameworks. The study concludes that enhancing accounting quality through digitalization is primarily achieved by integrating technological advancements and refined procedural mechanisms. Although the development of the entrepreneurial ecosystem is positively affected by digital transformation, achieving a meaningful influence on financial reporting outcomes requires deeper regulatory alignment and greater adherence to industry professional standards.

Theoretically, this study makes a potentially significant contribution by being one of the first to combine institutional theory and entrepreneurial ecosystem perspectives to explain how digital transformation enhances financial reporting quality in a conflict-affected economy (Faith and Kariuki, 2024). It proposes a context-aware model that connects digital adoption, ecosystem embeddedness, and governance outcomes, providing a more precise explanation of how digitalization influences accounting quality in environments with fragile institutions.

This study presents a contingency-based perspective, highlighting that the impacts of digital transformation depend on context rather than being universally predetermined. It advances the theoretical understanding in four significant ways. First, it extends digital transformation scholarship by empirically confirming that digital technologies serve as governance infrastructures that directly improve accounting information quality in emerging markets (Al-Htaybat et al., 2025; Amoako et al., 2025; Zhang et al., 2025). Second, it bridges ecosystem theory and accounting research by integrating the entrepreneurial ecosystem into a financial reporting model. The findings refine ecosystem theory by showing that ecosystem dynamism does not inherently translate into governance improvements without institutional complementarities (Kantis et al., 2025). Third, the non-significant mediation effect contributes to institutional theory by showing that digital capabilities may substitute for ecosystem maturity in fragile regulatory environments. This aligns with evidence from MENA contexts indicating that digital systems can strengthen accounting structures independently of broader institutional development (Al-Najjar et al., 2025). Fourth, the study contributes geographically by providing empirical evidence from Palestine, an underexamined emerging economy, thereby enhancing contextual diversity in digital accounting research (Phornlaphatrachakorn and NA Kalasindhu, 2021).

The findings provide specific, actionable recommendations for policymakers and industry stakeholders:

1. Mandate Digital Reporting Standards: Authorities such as the PCMA should require standardized digital reporting formats, such as real-time disclosures and integrated systems, to enhance transparency and comparability.

2. Implement Sector-Specific Digital Audits: Regular digital audits should focus on AI-driven reporting systems, data integrity, and automated controls to ensure effective technology use.

3. Link Ecosystem Programs to Compliance Outcomes: Innovation hubs and industry initiatives need to be connected to clear governance measures, such as the quality of disclosures and timeliness of reports, rather than just innovation achievements.

4. Develop Certified Digital Accounting Skills: Mandatory certification programs should be created for accountants and auditors in areas such as data analytics, blockchain reporting, and digital compliance.

Overall, digital transformation must be treated as a regulated governance tool, with defined standards, monitoring processes, and skill-building initiatives to achieve measurable enhancements in financial reporting quality.

To build on this study's insights, future research should examine additional mediators or contextual variables that amplify the EE's contribution to financial reporting quality (FRQ) (Liudmyla and Maria, 2022). Possible directions include: (a) investigating organizational agility and corporate governance maturity to clarify how digital and entrepreneurial drivers influence FRQ; (b) conducting comparative studies across sectors or national contexts to identify patterns and frameworks for improving reporting quality through digital transformation; (c) using longitudinal data collection or mixed-methods approaches to capture evolving challenges in ecosystem development and digital adoption; and (d) exploring how digital technologies interact with reporting standards and regulatory reforms to align innovation with compliance.

These research directions will help develop a nuanced understanding of how to leverage digital transformation and entrepreneurial ecosystems to strengthen financial reporting systems in developing economies (World Bank, 2023a, b).