Cash management amid HFCAA-Induced data breach risks: A comparative analysis of reactive vs. proactive responses in Chinese firms

Abstract

Following the introduction of the Holding Foreign Companies Accountable Act (hereafter referred to as HFCAA), U.S.-listed Chinese stocks are faced with economic risk and the risk of data breaches. This study examines the relationship between political data breach risks and cash holdings of firms in China. In response to the risk of data breaches posed by the HFCAA, we believe that Chinese firms may have two competing defend strategies: the reactive defend strategy, which increases their cash reserves as a precautionary measure, and the proactive defend strategy, which utilizes their cash to strengthen their competitive barriers. In the baseline results, we find that when firms in China perceive the industry spillover effect of data breaches, which is from U.S.-listed Chinese firms identified by HFCAA, they will hold less cash, which is consistent with the proactive risk strategy. Our results are robust to alternative measures of cash holdings, parallel trend assumption, PSM-DID and placebo tests. Cross-sectional tests also show that firms with different levels will have various effects. In addition, our further analyses elucidate the channels through which cash holdings are influenced, finding that when faced with data breach risks, Chinese firms are likely to increase their R&D expenditures, which correlates with an increase in the value of their cash holdings.