Data Breach Can Affect Company's Long-Term Stock Price

Security teams are all too familiar with how a data breach affects the security posture of an organization. The changes that are made post-breach -- both reactive and pro-active -- can greatly affect how the organization conducts itself.

However, CompariTech is thinking beyond the intra-organizational effects data breaches can have to determine how companies can weather the financial storm following a disclosure of these security incidents.

The review firm has the idea that these breaches will instill doubt in consumers and damage the company's reputation. Not only that, the effects can last for years. This means that a data breach can harm both public sentiment and a company's competitive edge in the market.

Researchers have also wondered wonder if investors would punish companies that leak customer data. These questions are the subject of the 2018 update of the CompariTech analysis, "How Data Breaches Affect Stock Market Share Price," written by Paul Bischoff.

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So, what damage can a data breach do?

CompariTech analyzed the closing share prices of 24 companies that were all listed on the New York Stock Exchange. Researchers looked at the company's stock price starting the day prior to the public disclosure of its respective data breach.

Included in the study are many of the largest data breaches in history; all of them resulted in at least 1 million records leaked, and some surpassed 100 million. Some companies were found to be breached more than once, for a total of 28 breaches analyzed.

These companies included: Apple, Adobe, Anthem, Community Health Systems, Dun & Bradstreet, Ebay, Equifax, Experian, Global Payments, Home Depot, Health Net, Heartland Payment Systems, JP Morgan Chase, LinkedIn, Monster, T-Mobile, Sony, Staples, Target, TJ Maxx, Under Armour, Vodafone and Yahoo.

When CompariTech did the first iteration of this analysis in previous years, the firm simply looked at whether the share price went up or down.

The researchers soon realized that this method fails to account for market forces beyond the scope of the study. To control for this, they added a second stage to the analysis.

In this new phase, researchers compared the performance of each stock with the Nasdaq for the same time period and calculated the difference in performance between the two. This means that the research made the Nasdaq's performance the baseline instead of zero as the original research had done.

CompariTech found that 14 market days after a breach, share price would underperform the Nasdaq by -4.6%, but after a month -- about market 22 days -- prices are only down -1.76% against the Nasdaq. After six months, the average share price performance recovers and even surpasses Nasdaq performance, specifically +0.09% verses Nasdaq.

The research also found that breaches can have an overall, long-term negative effect on share price in the long term. After one year, share price has grown 8.53% on average, but will underperform the Nasdaq by -3.7%.

After two years, average share price rose 17.78%, but underperformed the Nasdaq by -11.35%.

Further analysis found additional changes between stocks in each sector, size of data breached and the sensitivity of stolen information.

In the 2018 study, they shifted the focus to six months instead of one to three years of outcome. It found the effect of data breaches on share price diminishes over time, so they chose to look at a shorter period of time when changes in share price are more directly attributable to data breaches.

In comparing this year to last year, the paper noted: "In the 2018 study, we noted a slower decline in performance over time than in 2017. This is most likely to do with the introduction of new companies and breaches in the data set."

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— Larry Loeb has written for many of the last century's major "dead tree" computer magazines, having been, among other things, a consulting editor for BYTE magazine and senior editor for the launch of WebWeek.