Adverse Effects of Data Breach on Public Companies: A Study Based on Interpersonal Gossip Theory

Abstract

ABSTRACT The ability to effectively curb the adverse effects of data breach has become an urgent issue for enterprises. Employing interpersonal gossip theory, this study argues that the mechanism relating to information transparency and control provided by companies helps mitigate the adverse effects of data breach on these companies. Using listed companies in China with data breach in 2011–2020 as the treatment group and firms without data breach as the control group. We test the two-period PSM-DID model and find that transparency and control can effectively suppress the adverse effects of data breach on companies’ stock price and revenue. Specifically, the mechanism test found that: transparency and control inhibit the adverse effects of data breach by reducing negative rhetoric. The heterogeneity test found that firms with low institutional investor ownership significantly reduce the adverse effects of data breach by using transparency and control, while the dampening effect only occurs in state-owned enterprises with a high level of transparency. This study contributes to understanding the importance of establishing data security systems in firms and provides insights into the governance of data breach in listed firms.