IT Risk and Stock Price Crashes (Working Paper)

Song, Victor, Hasan Cavusoglu, Mary L. Z. Ma, Gene Moo Lee (2022) “IT Risk and Stock Price Crashes,” Major Revision, Information Systems Research. [HICSS version]

As firms increasingly depend on Information Technology (IT), risks associated with IT have become one of the top concerns for managers and investors. This study examines the relation between the IT-related risk factor 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 topic modeling to identify IT-related risk factors, we find that IT risk emerges as one of the 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 non-cybersecurity IT 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 non-cybersecurity IT risk does not, consistent with their different risk natures. We also find that the readability, novelty, and the order of appearance of the IT risk factor in Item 1A enhance the information content of IT risk factors and strengthen their relation with stock price crash risk.