State-sponsored cyber attacks and co-movements in stock market returns: evidence from US cybersecurity defense contractors

State-sponsored cyber attacks are increasingly attracting attention in the literature, with many analysts interested in the firm-level economic implications of these attacks. Nevertheless, the bulk of these studies focus on firms directly targeted in the attacks. In this paper, I examine the broader, often overlooked ripple effects of these attacks on third-party entities like cybersecurity service providers who are frequently at the frontlines of dealing with these attacks. Leveraging data on cyber attacks and stock market returns for a sample of U.S. based cybersecurity defense contractors from 2000 to 2020, I empirically demonstrate that an escalation in the intensity of state-sponsored cyber attacks prompts a behavioral shift among investors and regulators, leading to increased co-movement in firms’ stock returns. This paper thus adds a novel dimension to our understanding of the complex interplay between state-sponsored cyber attacks and the market dynamics of cybersecurity defense contractors, with important implications for national cybersecurity.