The Effect of Data Breaches on Shareholder Wealth

26 Pages Posted: 17 Apr 2008 Last revised: 26 Mar 2009

See all articles by Kevin Gatzlaff

Kevin Gatzlaff

Florida State University - Department of Risk Management/Insurance, Real Estate and Business Law

Kathleen A. McCullough

Florida State University - College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2008

Abstract

Many companies face the risk of a data breach exposing stored personal information of customers and employees. The frequency of such incidents has been increasing over time and can result in significant costs for the affected firm. This paper examines the stock market's assessment of the cost of data breaches at publicly traded companies in which personal information such as customer and/or employee data is exposed. Using event study methodology on a sample of 77 events between the beginning of 2004 and the end of 2006, we find that the overall effect of a data breach on shareholder wealth is negative and statistically significant. Based on a cross-sectional analysis of the cumulative abnormal returns, we find a negative association between market reaction and firms that are less forthcoming about the details of the breach. We also find that firms with higher market-to-book ratios experience greater negative abnormal returns associated with a data breach. Further, we find that firm size and subsidiary status mitigate the negative effect of a data breach on the firm's stock price and that the negative market reaction to a data breach is more significant in the most recent time periods of the sample.

Keywords: data breach, event study, shareholder wealth, privacy breach

JEL Classification: C21, G14

Suggested Citation

Gatzlaff, Kevin M. and McCullough, Kathleen A., The Effect of Data Breaches on Shareholder Wealth (October 1, 2008). Risk Management & Insurance Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1121172

Kevin M. Gatzlaff

Florida State University - Department of Risk Management/Insurance, Real Estate and Business Law ( email )

College of Business
Tallahassee, FL 32306
United States

Kathleen A. McCullough (Contact Author)

Florida State University - College of Business ( email )

Department of Risk Management and Insurance
150 Rovetta Business Building
Tallahassee, FL 32306-1110
United States
850-644-8358 (Phone)
850-644-4077 (Fax)

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