Cybersecurity, Internal Controls, and Brand Capital

54 Pages Posted: 21 Aug 2021 Last revised: 16 Apr 2023

See all articles by Po-Hsuan Hsu

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance; National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Wei-Chuan Kao

National Taiwan University - Department of Accounting

Yanzhi Wang

National Taiwan University - Department of Finance

Date Written: July 25, 2022

Abstract

In this paper, we examine whether and how firms’ brand capital is hurt by cybersecurity breaches. Our difference-in-differences analysis based on matched pairs indicates that firms suffering cybersecurity breaches are associated with more canceled trademarks, fewer trademark registrations, and fewer trademark citations, all pointing to weakened brand capital. We also show that cybersecurity breaches are associated with more negative news sentiments and poorer operating performance, suggesting that the loss of clients’ trust serves as the underlying mechanism. Additional analyses show that brand capital is hurt more by cybersecurity breaches when firms engage in more internet advertising activity, when firms are headquartered in states that enact notification laws, or when firms have poorer internal controls. We also find an intriguing pattern that cyberattacks on a firm also hurt its peers’ brand capital, a finding that supports a contagion effect.

Keywords: cybersecurity; brand value; trademarks; customer trust.

JEL Classification: D83; G32; O34

Suggested Citation

Hsu, Po-Hsuan and Kao, Wei-Chuan and Wang, Yanzhi, Cybersecurity, Internal Controls, and Brand Capital (July 25, 2022). Available at SSRN: https://ssrn.com/abstract=3907923 or http://dx.doi.org/10.2139/ssrn.3907923

Po-Hsuan Hsu (Contact Author)

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
China

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Wei-Chuan Kao

National Taiwan University - Department of Accounting ( email )

No.85, Sec. 4, Roosevelt Road
Taipei, 10617
Taiwan

Yanzhi Wang

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

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