PurposeDigital transformation provides a new impetus for the development of declining firms. However, there is currently a lack of sufficient research on whether digital transformation is beneficial for the turnaround of declining firms. This paper aims to explore the relationship between digital transformation and the turnaround of declining firms.Design/methodology/approachDrawing on the theoretical foundations of the resource-based view and dynamic capabilities theory, this research uses a comprehensive dataset of Chinese A-share listed companies from 2010–2021 to explore the influence of digital transformation on the turnaround of declining firms.FindingsThe research findings show that digital transformation contributes to the turnaround of declining firms. Mechanism analyses demonstrate that digital transformation enhances dynamic capabilities and attracts more analysts, thereby facilitating the turnaround process. Moreover, the moderation analysis reveals that CEO equity incentives strengthen the positive correlation between digital transformation and the turnaround of declining firms. Heterogeneity analysis indicates that the association between digital transformation and the turnaround of declining firms is particularly significant for firms with low financing constraints and high-tech firms. Moreover, this research reveals that digital transformation can facilitate the turnaround of firms in deep and long-term decline.Originality/valueThis research contributes to the literature on the digital transformation of enterprises and provides important insights for the turnaround of declining firms.