Police said they were called to Sportsmans Way at South West Rocks just after 11pm on Saturday following reports a man had been punched in the face, fallen and hit his head on the pavement.
Officers found 45-year-old Davidson unconscious on the ground. He was treated at the scene by ambulance paramedics before being taken to Kempsey hospital, where he died a short time later.
Police arrested a 42-year-old man at home in South West Rocks early on Sunday and charged him with assault causing death.
A man, 42, has been arrested and charged with assault causing death.
Mr Davidson grew up in Sydney and competed on the world surfing tour in 2010 and 2011.
He shot to fame as a 19-year-old after he was granted a wildcard entry into the Rip Curl Pro at Bells Beach, Australia, in 1996. There, he beat reigning world champion Kelly Slater in two consecutive heats.
Mr Slater was among those who paid tribute to Mr Davidson after his death.
"Had many a good battle with this guy. One of the most naturally talented surfers I ever knew," the 11-time world champion wrote on Instagram.
Surfing New South Wales executive director Mark Windon said Mr Davidson was "one of the most stylish surfers" Australia had ever produced.
"He was an absolute prodigious talent and as flamboyant as he was in the water," he told the Australian Broadcasting Corporation.
"[He] was a larger-than-life character, and for his life to finish that way is really sad."
Police have not released further details about the incident in South West Rocks, a small coastal town.
The 42-year-old man was refused bail on Monday and will next face a court in November, local media said.
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