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The effect of cybersecurity legislation on firm cost behavior: Evidence from China

Author

Listed:
  • Wang, Fangjun
  • Wang, Hao
  • Li, Jiyuan

Abstract

Cybersecurity risk has attracted the attention of legislators in various countries. This paper takes cybersecurity law (CSL) rollout in China as an exogenous event to study the impact of cybersecurity legislation on firm cost behavior. We find that cost stickiness decreases after the implementation of CSL. Our results also reveal that CSL reduces cost stickiness by mechanism of enhancing internal control, mitigating agency problem, and lowering managerial optimistic expectations. CSL's effect on cost stickiness exists in non-state-owned enterprises (non-SOEs) and firms in regions with low privacy sensitivity. CSL reduces stickiness of cost of goods manufactured (COGM), not R&D. CSL's effect on reducing cost stickiness can ultimately enhance firm value. Our research sheds light on the effect of cybersecurity mandates and advances literature on the impact of digital regulations on cost behavior.

Suggested Citation

  • Wang, Fangjun & Wang, Hao & Li, Jiyuan, 2024. "The effect of cybersecurity legislation on firm cost behavior: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:pacfin:v:86:y:2024:i:c:s0927538x24002117
    DOI: 10.1016/j.pacfin.2024.102460
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    More about this item

    Keywords

    Cybersecurity; Legislation; Cost stickiness; Difference-in-differences;
    All these keywords.

    JEL classification:

    • K24 - Law and Economics - - Regulation and Business Law - - - Cyber Law
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • M15 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - IT Management
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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