Consumer Protection Regulation and the Cost of Equity: Evidence from Data Breach Disclosure Laws

Posted: 19 Jan 2019 Last revised: 22 May 2020

See all articles by Musaib Ashraf

Musaib Ashraf

University of Arizona, Department of Accounting

Jayanthi Sunder

University of Arizona - Eller College of Management

Date Written: December 27, 2018

Abstract

We exploit plausibly exogenous state-level variation in data breach disclosure laws to study the impact of consumer protection regulation on firms’ cost of equity capital. We find that cost of equity decreases, on average, after the staggered passage of these laws by U.S. states. This is consistent with the laws incentivizing firms to proactively invest in cybersecurity and reduce exposure to cyber risk. The beneficial impact on the cost of equity is weaker for firms that invest in information technology and cybersecurity regardless of the laws and firms with greater sensitivity to adverse consequences that are triggered if a firm were to disclose a data breach in the future. Finally, after passage of these laws, firms are more likely to have an IT security executive officer and increase investments in information technology, suggesting that these laws are effective in inducing firms to take real actions to reduce cyber risk.

Keywords: cybersecurity, cyber risk, disclosure laws, cost of capital, information technology

JEL Classification: G120, G340

Suggested Citation

Ashraf, Musaib and Sunder, Jayanthi, Consumer Protection Regulation and the Cost of Equity: Evidence from Data Breach Disclosure Laws (December 27, 2018). Available at SSRN: https://ssrn.com/abstract=3308551 or http://dx.doi.org/10.2139/ssrn.3308551

Musaib Ashraf

University of Arizona, Department of Accounting ( email )

Tucson, AZ
United States

Jayanthi Sunder (Contact Author)

University of Arizona - Eller College of Management ( email )

School of Accountancy
1130 E Helen St.
Tucson, AZ 85721
United States
520-626-8489 (Phone)

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