Reaction of stock volatility to data breach: An event study

Abstract

The paper assesses how stock market volatility reacts to data breach disclosure. The paper applies Volatility Event Analysis and Kolmogorov-Smirnov Test to analyse how equity risk (stock volatility) of 96 firms listed on the S&P1 500 index reacted to the disclosure of a data breach using records from Breach Level Index) of empirical analyses were performed. The study employs statistical tests that adjust for the effects of cross-section firm-specific mean and volatility. The analysis delivers the following results: Firstly, cross-sectional analysis shows that there is evidence of significant abnormal across the firms and significant difference between the 'pre' and the 'post' breach disclosures. Secondly, the industry level analysis reveals that the firms in the financial sector exhibit more abnormal volatility and returns than firms in other sectors. And while there are significant differences between the 'pre' and 'post'-disclosures, the effect tends to be more pronounced with the post-disclosure. Implying that data breach disclosures can significantly influence equity volatility.