By examining managers’ decisions about disclosing updated assessments of firms’ risks, we present evidence that the risk factor disclosures are informative. We use the setting of cybersecurity risk factor disclosures after a data breach because data breaches, especially severe breaches, serve as a natural experiment where an exogenous shock to managers’ assessment of their firm’s cybersecurity risks occurs. We analyze the topic from the perspective of two different theoretical lenses: the economic lens of optimal risk exposure and the ethical lens of stakeholder theory. Using a sample of firms experiencing data breaches, we find that firms experiencing a data breach increase the amount of cybersecurity risk factor disclosures compared to matched firms with no data breach. Further investigation reveals that the severity of data breaches affects the results; cybersecurity risk factor disclosures increase only after severe data breaches. While there is no significant market reaction if breached firms’ subsequent annual reports include increased cybersecurity risk factor disclosures, a significant negative market reaction occurs if breached firms decrease cybersecurity risk factor disclosures, regardless of the severity of the breach, implying that the market anticipates increased disclosures after data breaches.
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