Data Breach Announcement Effect on Bank Operations and Performance

Abstract

A downside of the digital economy is that banks are prone to experiencing data breaches resulting from, for example, cyberattacks, system glitches, and employee negligence. We investigate how a data breach announcement affects bank operations and stock performance. Our findings show that banks have an outflow of insured and brokered deposits after a data breach announcement. Furthermore, we find that deposits transfer from banks with data breaches to banks with no history of experiencing data breaches. Data breaches negatively affect stock returns in both the short term and long term. However, we do not find a systematic long-term impact from the data breach announcement on bank operations. In terms of lending, banks with data breach tend to increase their lending after announcements, which is supported by the incentive of CEO compensations. Higher lending could be associated with CEOs' wealth preservation for banks with data breach.

Keywords: bank operations and performance, cybersecurity, data breach, bank stability

JEL Classification: G14, G21