The Impact of Real Earnings Management on Cybersecurity: Evidence from Data Breaches

Abstract

Using a large sample of U.S. firms for the period 2005–2017, we provide evidence that real earnings management activities contribute to corporate cybersecurity risk. Specifically, we show that abnormal cuts in discretionary expenditures, our proxy for real earnings management, are positively associated with the likelihood of data breaches. The association is largely driven by firms that appear to cut discretionary expenditures to meet short-term earnings targets. In addition, the association is stronger for firms with greater equity incentives, a high earnings response coefficient, low levels of institutional or block ownership, or large market shares. Finally, firms appear to increase abnormal discretionary expenditures upon the announcement of data breaches by their industry peers.

Keywords: cybersecurity, data breach, managerial myopia, discretionary expenditures, real effect

JEL Classification: G31, G32, G34, M15, M41