Cybersecurity Breaches in the Supply Chain and Earnings Management

Abstract

ABSTRACTOur study examines the relationship between supply chain cybersecurity breaches and firms' strategic response. Supplier or major customer breaches could result in a spillover effect on other targeted supply chain firms' behavior. While a cybersecurity breach does not directly impact these targeted firms, there could be negative financial consequences of being associated with the same supply chain. Based on transaction cost theory, targeted firms could react strategically through earnings to reduce increased supply chain transaction costs incurred in supply chain breaches and mitigate negative breach effects. We expect and find that targeted firms react strategically through real activities following a supply chain breach. Further, our results provide evidence that targeted firms respond to customer breaches to a greater degree than supplier breaches, reflecting significant customer transaction costs. Our study contributes to the understanding of the impact breaches can have on nonbreached firms' behavior.