The Market Value and Reputational Effects from Lost Confidential Information

According to many business publications, firms that experience information security breaches suffer substantial reputational penalties. This paper examines incidents in which confidential information, for a firm's customers or employees, is stolen from or lost by publicly traded companies. Firms that experience such breaches suffer statistically significant losses in the market value of their equity. On the whole, the data indicate that these losses are of similar magnitudes to the direct costs. Thus, direct costs, and not reputational penalties, are the primary deterrents to information security breaches. Contrary to many published assertions, on average, firms that lose customer information do not suffer reputational penalties. However, when firms lose employee information, we find significant reputational penalties.