The Effect of Cybersecurity Breaches on Analysts' Earnings Forecasts

We investigate the implications of cybersecurity breaches for financial analysts because they play an important role as information intermediaries in capital markets, and it is unknown whether analysts' earnings forecasts are affected by cybersecurity breaches. Based on a sample of cybersecurity breaches from 2005 to 2018, we find that analysts' earnings forecasts for firms with cybersecurity breaches are less accurate and more dispersed after a breach than for firms without such breaches. In cross-sectional analyses, we find that the adverse effects of cybersecurity breaches on analysts' earnings forecasts are more pronounced for firms operating in more volatile business environments, for firms operating in industries with greater growth opportunities, and for firms with poorer internal information environments; however, these effects are attenuated when management provides more earnings guidance for the fiscal year. These results suggest that the economic and reporting complexities associated with cybersecurity breaches can hinder analysts' ability to forecast earnings. Finally, we find some evidence that the adverse effect of cybersecurity breaches on analysts' earnings forecasts also varies with the type and severity of breaches. Overall, our study extends the literature on the consequences of cybersecurity breaches and the factors influencing analysts' earnings forecast properties.