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<b>Online Exclusive:</b> Study Finds Weak Link Between Privacy Breach, Stock Price Slippage
A new study by professors from Carnegie Mellon and Harvard has found only a short-term link between a public company having a well-publicized privacy breach and a reduction in its stock price. The findings, which the professors emphasize are 'very preliminary,' challenge the conventional wisdom that companies should invest heavily in protecting customers' privacy because the marketplace will punish them. The draft paper can be read at http://weis2006.econinfosec.org/docs/40.pdf.
In the study of 79 well-publicized privacy breaches, Alessandro Acquisiti (Carnegie Mellon), Allan Friedman (Harvard), and Rahul Telang (Carnegie Mellon) found that a company's stock price falls on the day that a privacy incident is announced, but in less than a week, the price shows no negative impact. The findings contradict anecdotal evidence that companies such as ChoicePoint are punished in the stock market by poor privacy practices.
The authors calculated that a company's stock price falls by about 0.4% on the day a breach is announced, after factoring out all other market and company developments on that day. The stock price dip continues into the next day, reaching nearly 0.6%. But by 5 days after a breach is announced, the stock price has rebounded into positive territory. Retailers suffer greater drops, as would be expected due to their sensitivity to consumer trust issues. And larger breaches generate larger effects.
The quick rebound of stock prices indicates a different reaction to privacy breaches than to other types of security breaches, the authors added. Several studies published in the past few years indicate that when a company suffers a security breach (hackers, denial of service, etc.), the impact is significant and long-lasting.
However, the authors acknowledge the difficulties of quantifying the privacy-breach effect. Complicating factors include: determining how much of a stock price movement can be tied to the single breach event; dating when a breach first became widely known to the public; and assessing whether the full extent of the breach was known in the initial announcement.
A new study by professors from Carnegie Mellon and Harvard has found only a short-term link between a public company having a well-publicized privacy breach and a reduction in its stock price. The findings, which the professors emphasize are 'very preliminary,' challenge the conventional wisdom that companies should invest heavily in protecting customers' privacy because the marketplace will punish them. The draft paper can be read at http://weis2006.econinfosec.org/docs/40.pdf.
In the study of 79 well-publicized privacy breaches, Alessandro Acquisiti (Carnegie Mellon), Allan Friedman (Harvard), and Rahul Telang (Carnegie Mellon) found that a company's stock price falls on the day that a privacy incident is announced, but in less than a week, the price shows no negative impact. The findings contradict anecdotal evidence that companies such as ChoicePoint are punished in the stock market by poor privacy practices.
The authors calculated that a company's stock price falls by about 0.4% on the day a breach is announced, after factoring out all other market and company developments on that day. The stock price dip continues into the next day, reaching nearly 0.6%. But by 5 days after a breach is announced, the stock price has rebounded into positive territory. Retailers suffer greater drops, as would be expected due to their sensitivity to consumer trust issues. And larger breaches generate larger effects.
The quick rebound of stock prices indicates a different reaction to privacy breaches than to other types of security breaches, the authors added. Several studies published in the past few years indicate that when a company suffers a security breach (hackers, denial of service, etc.), the impact is significant and long-lasting.
However, the authors acknowledge the difficulties of quantifying the privacy-breach effect. Complicating factors include: determining how much of a stock price movement can be tied to the single breach event; dating when a breach first became widely known to the public; and assessing whether the full extent of the breach was known in the initial announcement.
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