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

Posted: 22 Nov 2019 Last revised: 30 Mar 2020

See all articles by Wen Chen

Wen Chen

City University of Hong Kong (CityUHK)

Xing Li

City University of Hong Kong; Xi'an Jiaotong University

Haibin Wu

City University of Hong Kong (CityUHK)

Liandong Zhang

Singapore Management University - School of Accountancy

Date Written: November 12, 2019

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

Suggested Citation

Chen, Wen and Li, Xing and Wu, Haibin and Zhang, Liandong, The Impact of Real Earnings Management on Cybersecurity: Evidence from Data Breaches (November 12, 2019). Available at SSRN: https://ssrn.com/abstract=3485532

Wen Chen (Contact Author)

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Xing Li

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Xi'an Jiaotong University ( email )

XI AN, SHANNXI
China

Haibin Wu

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Liandong Zhang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

HOME PAGE: http://accountancy.smu.edu.sg/faculty/profile/150531/Liandong-ZHANG

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