IT Risk and Firm Propensity to Stock Price Crash
by
Hasan Cavusoglu
Associate Professor of MIS
Accounting and Information Systems Division
Sauder School of Business
University of British Columbia
Friday, Feb 26
1 – 2 pm | Zoom
(send an email to ayabakan@temple.edu to get the Zoom link)
Abstact:
As firms increasingly depend on Information Technology (IT) in their business strategies and value creation activities, risks associated with IT have become one of the top concerns for managers and investors. This study examines the relation between IT-related risk factor information in Item 1A of the 10-K annual reports and a firm’s stock price crash risk, a firm specific propensity to stock price crashes. Using the text-mining approach of Latent Dirichlet Allocation topic modeling to identify IT-related risk factors, we find that IT risk emerges as one of firms’ key risk categories and that IT risk factors are positively associated with a firm’s future stock price crash risk. We further separate IT risk factors into cybersecurity risk that potentially leads to a loss or leak of data, and IT value risk that relates to a firm’s reliance on IT for its competitive advantage and value creation activities. We find that cybersecurity risk continues to affect crash risk, but IT value risk does not, consistent with their different risk nature. We also find that the readability, novelty, and the order of appearance of the IT risk factor information in Item 1A enhance the information content of IT risk factors and strengthen their relation with stock price crash risk.