LAW & ECONOMICS COLLOQUIUM
presents
Eric Talley
Columbia Law School
INFORMED TRADING AND CYBERSECURITY BREACHES
Tuesday, February 13, 2018
4:10 – 5:45
Flavelle Building, Room 219
78 Queen’s Park
Cybersecurity has become a significant concern in corporate and commercial settings, and for good reason: a threatened or realized cybersecurity breach can materially affect firm value for capital investors. This paper explores whether market arbitrageurs appear systematically to exploit advance knowledge of such vulnerabilities. We make use of a novel data set tracking cybersecurity breach announcements among public companies to study trading patterns in the derivatives market preceding the announcement of a breach. Using a matched sample of unaffected control firms, we find significant trading abnormalities for hacked targets, measured in terms of both open interest and volume. Our results are robust to several alternative matching techniques, as well as to both cross-sectional and longitudinal identification strategies. All told, our findings appear strongly consistent with the proposition that arbitrageurs can and do obtain early notice of impending breach disclosures, and that they are able to profit from such information. Normatively, we argue that the efficiency implications of cybersecurity trading are distinct—and generally more concerning—than those posed by garden-variety information trading within securities markets. Notwithstanding these idiosyncratic concerns, however, securities fraud doctrine in its current form appears poorly adapted to address such concerns, and it would require nontrivial re-imagining to meet the challenge (even approximately).
Eric Talley is the Isidor and Seville Sulzbacher Professor of Law and Faculty Co-Director, Millstein Center for Global Markets and Corporate Ownership. He is an expert in the intersection of corporate law, governance, and finance, and he teaches/researches in areas that include corporate law and finance, mergers and acquisitions, quantitative methods, machine learning, contract and commercial law, game theory, and economic analysis of law.
For more colloquium information, please contact Nadia Gulezko at n.gulezko@utoronto.ca.
