The Impact of Customer Privacy Breaches on Market Value

Abstract

Risk assessment of privacy breaches is an important component in IT security management. However, it has been said that a decrease of long-term sales and brand value is unfathomable, while a direct expense, such as technical and customer issues, is assessable. This study tries to measure reductions of firms' value in the stock market immediately after privacy breach incidents as the estimated damage using the event study methodology. The research analyzes reactions of the stock market for 118 events of listed firms from 1997 to 2004. The result shows a significant negative abnormal return of -0.667% is observed on the average. Incidents in recent years OR with larger-scale breaches lead to more negative abnormal returns. The average of abnormal returns in recent years AND with larger-scale breaches is -1.726% and one third of the variance is explained by a regression model.