Report: Security Slip-Ups Don't Ding Stock Prices For Long
Although prices may dip temporarily on bad news of a data breach, the price rebounds quickly.
Most major security blunders don't affect the company's stock price for long, a researcher reported this week. In fact, investors may be able to use the rebound to make money.
Kenneth Belva, who runs a security consulting company on the side and is an information security officer for Credit Industriel et Commercial in New York during the day, analyzed several prominent data breaches in 2004 and 2005 by comparing the negative press of the incident with the movement of the firm's stock price.
"Why is it the case that information security incidents do not appear to have a greater impact on both investor confidence as well as the public at large? " asked Belva this week as he presented his research at the FiTech Summit on Long Island, N.Y. "If 40 million customer credit card numbers are exposed in a security breach at the credit card processor CardSystems , why do a significant number people not cancel their Visa and/or Mastercard?"
To answer those questions, Belva charted stock prices before and after data losses at the likes of Polo Ralph Lauren, UPS, Choicepoint, Bank of America, and Citigroup; took into account other news during those time spans that likely affected the price; and also looked at the long range trends in each company's stock.
"[Stock prices are] the only publicly visible measure of confidence in a corporate institution," said Belva.
Most security problems don’t effect the company's stock price. Although prices may dip temporarily on bad news of a data breach, the price rebounds quickly.
"[Security] incidents occur infrequently. If Citigroup and UPS lost 3.9 million customer records every week and Bank of America's employees were found to consistently sell customer information illegally, we would most likely change our minds about where we do business," said Belva in his paper.
In the Citigroup/UPS incident, in which the latter lost a shipment of tapes containing nearly 4 million current and former accounts, Belva found that Citigroup's stock price fell a puny .02 percent the day the financial firm put out a press release on the lost tapes, but that the stock actually rose 0.27 percent when the story made the media four days later. UPS' stock, meanwhile, climbed 0.22 percent the day after the story made the rounds.
Only when a data loss impacts the core business of a company -- such as when Choicepoint admitted to selling data to fraudsters, or when third-party credit card processor CardSystems was hacked, resulting in the exposure of nearly 40 million cards -- does the stock, and thus the company, take a hammering, Belva said.
In Choicepoint's case, its stock price fell 3.1 percent on the day the breach was reported, and then continued to fall. Five days after the story made the papers, for instance, its stock plummeted by nearly 10 percent.
"The reason for the long term loss was that their top line was affected," said Belva. "Choicepoint changed and dropped some of their information products as a result of their breach."
Belva also made note that the short-lived drop in the stock price of a company impacted by a data breach might be of interest to profiteers. "Perhaps the old adage to 'buy on bad news and sell on good news' may be applied here," he said. "Based on the known cases, there is a good chance that the stock will decline in the short term and rebound soon after. In effect, it may be possible to make money off the publicly reported breach.
"Granted I didn't say that was an ethical thing to do, only that it seems possible in theory," he temporized.
Belva's research paper, titled "How It's Difficult to Ruin A Good Name: An Analysis of Reputational Risk," can be downloaded from his Web site.
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