Stock Market Reactions to Data Breach Disclosures: An Empirical Study of Data Breaches in the U.S (2000-2021)

Ahmad El Zalaf

Student thesis: Master thesis


The exponential development in technology has created great opportunities for businesses. Companies worldwide has taken part in the digital transformation with great benefits, but unfortunately, the transformation is linked to new cyber related risks. This thesis focusses on the stock market reactions to news of data breaches in the United States considering new, stricter SEC regulation enacted in 2018. The Data Breach Disclosure Guidance of 2018 addressed several issues for the first time. First, data breaches are deemed as likely to be material, which implies that companies must disclose breaches to the public, and that insiders are prohibited from trading on such information prior to disclosure. This study therefore analyzes whether 2018 SEC regulation have influenced initial market reactions to disclosures, insider trading prior to disclosures and market efficiency. All hypotheses are analyzed using the Event Study Methodology. This study finds that firms who are subject to data breaches after the introduction SEC regulation experience significant and more negative abnormal returns compared to previous breaches. Furthermore, I find that the explicit ban on insider trading has not neutralized the apparent trading on private information prior to public disclosure; in fact, it seems the mandated disclosure laws have prompted insiders to trade on private information several weeks in advance. Finally, I find that markets have become inefficient in reacting to data breaches after the enaction of 2018 regulation. Breached companies initially experience significant and negative abnormal returns, followed by a significant, positive drift. This implies that markets initially overreact to news of a data breach, followed by a stock price reversal. My results have both academic and practical contributions. The results on abnormal returns raise awareness to researchers of possible changes in market reactions over time, and thus promotes the distinction between time periods in future research. Moreover, the systematic overreaction and reversal offer insight and potential investment strategies to investors. Specifically, event-driven investors may formulate a trading strategy based on these findings. Finally, my results show the existence of insider trading despite the explicit ban, which may motivate regulators to take further actions to neutralize such practices.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2021
Number of pages101
SupervisorsPeter Belling