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Data breaches and corporate liquidity management

Holding the underlying likelihood of experiencing a data breach constant, mandatory data breach disclosure laws increase risks and costs related to data breaches. This paper investigates the effects of data breach disclosure laws, and the subsequent disclosure of data breaches on the cash policies of corporations in the United States. Exploiting a series of natural experiments regarding the staggered state-level data breach disclosure laws, we show that the passage of mandatory disclosure laws leads to an increase in corporate cash holdings, particularly among financially constrained firms. This shows that data security transparency laws influence firm liquidity risk management. Further, we find firms that suffer data breaches adjust their financial policies by holding more cash, decrease their external financing as well as investment activities.