N°23-86: Data Risk, Firm Growth and Innovation

In the modern economy, data is a valuable firm asset, but it is fraught with risks including loss and destruction. In this paper, we examine how data risk impacts firm growth, financial outcomes, and innovation activities. Examining the universe of U.S. publicly-listed firms from 2000 to 2022, we find that higher data risk reduces knowledge stocks, decreases productivity, and slows growth for the average firm in the U.S. economy. Notwithstanding, there exists a select group of AI-intensive firms, highly exposed to data risk, which develop data protection strategies that enhance productivity in other domains. This positive spillover leads to higher innovation and profitability for these firms. The mechanism is that the same data engineers who develop data protection are also among the same inventors doing product innovation for these firms. In a second stage, we develop a structural heterogeneous-firm growth model of the data economy to rationalize the empirical findings and to provide some comparative statics exercises.