Enhancing digital governance capabilities constitutes a pivotal approach to advancing the modernization of China's governance system and capacity. Based on transaction cost theory, real options theory and signaling theory, the theoretical logic and mechanisms through which government digital governance influences urban innovation were clarified. Employing the "national information benefiting people pilot" policy as an exogenous shock, a difference-in-differences model was utilized for empirical testing. The findings reveal that digital governance significantly promotes urban innovation, a result that holds after a series of robustness tests. Moderation mechanism analysis demonstrates that the innovation-enhancing effects of digital governance are more pronounced in regions with higher information integration capacity and information transparency, indicating that digital governance facilitates information aggregation and disclosure, thereby fostering urban innovation. Mediating mechanism tests reveal that the government's digital governance have enhanced the emphasis on innovation and increased support for research and development, thereby elevating the city's innovation level. Heterogeneity analysis conduct within the "effective market, proactive government, and robust rule-of-law" framework reveals stronger innovation effects in regions with: higher marketization levels, stricter intellectual property protection, greater human capital endowment, and strategic innovation contexts. These findings enrich the theoretical framework of digital governance's impact on urban innovation, providing novel mechanistic insights, empirical evidence, and practical rationale for understanding how digital governance drives urban innovation.