Assessing the Risk in E-Commerce

Abstract:     
This study provides empirical evidence that capital markets participants believe e-commerce activity subjects companies to incremental firm-specific risk. We identify and measure proxies for e-commerce risks using a diverse sample of Internet and other firms. We first investigate investors' reactions to "hacker" attacks launched against several of the best-known Internet firms in February 2000. After excluding three firms in our sample that are known subjects of the attacks, we investigate whether remaining sample firms experienced "contagious" negative abnormal stock returns following the attacks. We find that the extent of negative abnormal returns is associated with several of the e-risk metrics. Investors appear to believe the likelihood a firm will be subject to similar attacks is positively related to its self-disclosed vulnerability to e-risks, and to its designation by outsiders as an Internet firm. The negative abnormal returns observed are substantial in magnitude and do not reverse over time.

The second risk assessment employed consists of financial stress scores provided by Dun & Bradstreet (D&B). We investigate whether D&B financial stress scores are significantly associated with Internet activity and e-risk metrics, while controlling for conventional (financial) measures of risk. We find that D&B give less favorable scores to "B2B" Internet firms, and to Internet firms disclosing controllable e-risks. Evidence also suggests that non-Internet firms disclosing e-risks receive less favorable D&B scores.

Overall the results suggest that reducing controllable e-risks would decrease the cost of debt and equity for Internet firms and, to a lesser extent, for non-Internet firms subject to e-risks.

Number of Pages in PDF File: 40

Keywords: Electronic commerce, risk

JEL Classification: G12, M41

working papers series