Cybersecurity Risk and Financial Performance Analysis of FinTech Firms using Panel Data

Abstract

Digital financial services have changed, with the fast-growing financial technology (FinTech) sector both becoming more exposed to cybersecurity risks, such as data breaches, ransomware, fraud, service disruptions and unauthorized access, and also undergoing transformation. The authors examine the relationship between cybersecurity risk and financial performance in FinTech companies in this study through a panel-data analysis. The novelty of the study is the creation of a Cybersecurity Risk Index (CRI) compounding various dimensions of cyber attacks- namely the frequency of attacks, the severity of a data breach, financial losses resulting from cyber attacks and disruption caused by cyber attacks, into a single measure of cyber risk at the firm level. The financial performance is measured by Return on Assets (ROA), Return on Equity (ROE), revenue growth, profit margin and firm valuation. A fixed-effects and random-effects panel regression analysis is performed on a longitudinal data set of the FinTech firms, along with moderation tests, robustness tests and endogeneity tests. Overall, the empirical findings suggest that there is a significant relationship between the cybersecurity risk and the financial performance, with higher cybersecurity risk being linked with lower financial performance. Companies impacted by regular, severe cyber incidents have lower ROA, ROE, revenue growth and profitability, as well as lower market valuation. On the other hand, more investment in cybersecurity and more secure capabilities lessen these negative impacts. The results show that cybersecurity is not just an operational risk, but also an investment strategic factor for the success of a FinTech business. The proposed CRI offers a convenient data-based tool for assessing risk, planning investments and making regulatory decisions.