Cybersecurity risks and stock liquidity

Qin Zhang and Jin Boon Wong

International Journal of Managerial Finance, 2025, vol. 21, issue 3, 841-861

Abstract: Purpose - This paper investigates the impact of ex-ante cybersecurity risks on stock market liquidity at the firm level. Design/methodology/approach - Using a US sample of 10,719 firm-year observations from 2007 to 2018, we employ fixed effects regressions, an innovative ex-ante cybersecurity risks measure and control for various market microstructure and firm-specific characteristics to examine the research question. To address endogeneity concerns, a two-stage least squares regression analysis with instrument variables and a propensity-matched sample is utilized to validate the findings. Findings - Our results show that ex-ante cybersecurity risks reduce stock liquidity in the form of higher bid-ask spreads and lower trading turnover. The findings are economically significant and accentuate the importance of cybersecurity risks to stakeholders, as a 1-standard deviation rise in cyber risks can increase bid-ask spreads by 15.55–31.20% and reduce trading turnover by 2.97%. Originality/value - We provide empirical evidence on the important differences between the instrument choice of ex-ante versus ex-post cybersecurity risks for market microstructure studies. Prior research suggests ex-post cybersecurity breaches lead to lower bid-ask spreads and increased trading volumes. These findings are counterintuitive. Our study contributes a missing piece to this puzzle by showing that increases in ex-ante cybersecurity risks lead to wider bid-ask spreads and lower trading turnover, possibly due to heightened information asymmetry. Furthermore, we show that during periods of elevated market uncertainty, these cyber-risk effects may be “overlooked” as market participants may be preoccupied with greater concerns at the macroeconomic level.

Keywords: Cybersecurity; Cyber risks; Stock liquidity; Information asymmetry; Market behavior; G12; G14; G32; G40 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:ijmf-05-2024-0253

DOI: 10.1108/IJMF-05-2024-0253

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