Are companies better off with AI? The effect of AI service failure events on firm value

Abstract

Purpose

As more firms adopted AI-related services in recent years, AI service failures have increased. However, the potential costs of AI implementation are not well understood, especially the effect of AI service failure events. This study examines the influences of AI service failure events, including their industry, size, timing, and type, on firm value.

Design/methodology/approach

This study will conduct an event study of 120 AI service failure events in listed companies to evaluate the costs of such events.

Findings

First, AI service failure events have a negative impact on the firm value. Second, small firms experience more share price declines due to AI service failure events than large firms. Third, AI service failure events in more recent years have a more intensively negative impact than those in more distant years. Finally, we identify different types of AI service failure and find that there are order effects on firm value across the service failure event types: accuracy > safety > privacy > fairness.

Originality/value

First, this study is the initial effort to empirically examine market reactions to AI service failure events using the event study method. Second, this study comprehensively considers the effect of contextual influencing factors, including industry type, firm size and event year. Third, this study improves the understanding of AI service failure by proposing a novel classification and disclosing the detailed impacts of different event types, which provides valuable guidance for managers and developers.

Citation

Song, D., Deng, Z. and Wang, B. (2025), "Are companies better off with AI? The effect of AI service failure events on firm value", Industrial Management & Data Systems, Vol. 125 No. 2, pp. 504-534. https://doi.org/10.1108/IMDS-02-2024-0076