City Research Online

Abstract

This thesis examines how digitalisation is reshaping financial intermediation, risk, and firm behaviour. While digital technologies can enhance efficiency and access to finance, they also introduce new operational vulnerabilities and challenges.

The four chapters study how cyber risk and financial innovation affect the behaviour of banks, firms, and borrowers, and how these changes can influence financial stability, risk management, and credit provision.

Chapter 1 examines debt holder reactions to material cybersecurity breaches at large U.S. listed banks. I document significant heterogeneity across funding sources: typically uninsured and information sensitive wholesale debt holders withdraw funding following a breach, while retail inflows partially offset these outflows in the immediate aftermath. Financial markets also reprice cyber risk, with stronger penalties for non-bank financial institutions, highlighting the stabilising role of retail deposits for banks. Inattentive retail debt holders display a privacy paradox, reacting mainly to breaches affecting data availability or integrity rather than confidentiality. Local conditions further shape responses. Retail
outflows are weaker in areas with higher financial literacy but amplified where privacy concerns are greater. Contagion across banks remains limited, with some reallocation of retail deposits to unaffected banks but no evidence of precautionary withdrawals from other cyber-risky institutions. From a policy and financial stability perspective, these findings highlight the importance of financial literacy in mitigating panic-driven withdrawals and suggest that financiers view cyber risk largely as idiosyncratic rather than systemic.

Chapter 2 studies how firms adjust their cyber risk management practices following material cyber incidents. Using detailed, granular job postings data, we develop novel measures of cybersecurity defences, including cyber labour demand, software usage, and IT architecture. Our results show that cyber incidents trigger persistent shifts in firms’ risk cultures, reflected in increased demand for cybersecurity skills and the adoption of new technologies. Firms with higher pre-incident cyber risk exhibit larger adjustments, whereas cyber insurance may dampen incentives to strengthen in-house capabilities. Among financial firms, larger institutions adapt more, consistent with stronger regulatory scrutiny. Importantly, we find significant spillover effects not only among firms within the same industry but also among those with similar IT systems, highlighting how shared system vulnerabilities can propagate cyber risk.

Chapter 3 focuses on firms’ pre-breach cyber risk management. We develop a theoretical framework of firm cybersecurity as an attacker–defender game and empirically test its predictions using granular job postings data. Results show that firms increase demand for cybersecurity skills when cyber attacks become either more costly or easier to execute. On the other hand, more expensive cyber-skilled labour reduces incentives to invest. Notably, cybersecurity investment exhibits a hump-shaped relationship with rewards to cyber attackers, reflecting diminishing returns as attacker gains become sufficiently large. Evidence further indicates that mandatory breach disclosure laws significantly enhance cybersecurity investment. Overall, our findings suggest that firms strategically optimise their cybersecurity defences in response to not only realised attacks, but also changing
economic incentives.

Chapter 4 explores how the rapid digitalisation accelerated by COVID-19 affected the role of Fin-Tech lenders. I leverage public loan-level Paycheck Protection Program (PPP) data to examine the geographic distribution of FinTech lending and study how FinTech lenders expanded their footprint in the small and medium-sized enterprise (SME) credit market in the post-PPP period. The results indicate an accelerated shift of SMEs from traditional to FinTech lenders in areas with higher FinTech PPP activity. This transition is not driven by more favourable loan terms, but rather by the operational advantages of FinTech lenders, the characteristics of prior lending relationships, and the underlying structure of local banking markets.

Publication Type:	Thesis (Doctoral)
Subjects:	H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management H Social Sciences > HF Commerce H Social Sciences > HG Finance Q Science > QA Mathematics > QA76 Computer software
Departments:	Bayes Business School > Bayes Business School Doctoral Theses Bayes Business School > Faculty of Finance Doctoral Theses

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