January 25, 2005

Do security breaches drop the share value?

According to those that think WiKID thoughts, yes. Quoting a paper by Campbell et al, there can be measured a 5% drop in stock price when confidentiality is breached. Adam demurs, thinking the market is unconcerned about the breaches of confidentiality, rather, is concerned about a) loss of customers or b) lawsuits.

I demur over both! I don't think the market cares about any of those things.

In this case, I think the market is responding to the unknown. In other words, fear. It has long been observed that once a cost is understood, it becomes factored in, and I guess that's what is happening with DDOS and defacements/viruses/worms. But large scale breaches of confidentiality are a new thing. Previously buried, they are now surfaced, and are new and scary to the market.

And the California law makes them even scarier, forcing the companies into the unknown of future litigation. But, I think once these attacks have run their course in the public mind, they will stop causing any market reaction. That isn't to say that the attacks stop, or the breaches in confidentiality stop, but the market will be so used to them that they will be ignored.

Otherwise I have a problem with a 5% drop in value. How is it that confidentiality is worth 5% of a company? If that were the case, companies like DigiCash and Zero-Knowledge would have scored big time, but we know they didn't. Confidentiality just isn't worth that much, ITMO (in the market's opinion).

The full details:

"The economic cost of publicly announced information security breaches: empirical evidence from the stock market," Katherine Campbell, Lawrence A. Gordon, Martin P. Loeb and Lei Zhou Accounting and Information Assurance, Robert H. Smith School of Business, University of Maryland, 2003.

Abstract This study examines the economic effect of information security breaches reported in newspapers or publicly traded US corporations. We find limited evidence of an overall negative stock market reaction to public announcements of information security breaches. However, further investigation reveals that the nature of the breach affects this result. We find a highly significant negative market reaction for information security breaches involving unauthorized access to confidential data, but no significant reaction when the breach does not involve confidential information. Thus, stock market participants appear to discriminate across types of breaches when assessing their economic impact on affected firms. These findings are consistent with the argument that the economic consequences of information security breaches vary according to the nature of the underlying assets affected by the breach.

Also over on Ross Anderson's Econ & Security page there are these:

Two papers, "Economic Consequences of Sharing Security Information" (by Esther Gal-Or and and Anindya Ghose) and "An Economics Perspective on the Sharing of Information Related to Security Breaches" (by Larry Gordon), analyse the incentives that firms have to share information on security breaches within the context of the ISACs set up recently by the US government. Theoretical tools developed to model trade associations and research joint ventures can be applied to work out optimal membership fees and other incentives. There are interesting results on the type of firms that benefit, and questions as to whether the associations act as social planners or joint profit maximisers.

Which leads to "How Much Security is Enough to Stop a Thief?," Stuart Schechter and Michael Smith, FC03 .

Posted by iang at January 25, 2005 02:00 PM | TrackBack
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