Do Data Breaches Affect Stock Prices?

Data breaches seem painfully common these days. Major breaches, like the ones that shook Target (NYSE:TGT) and Equifax (NYSE:EFX), quickly become known to the general public, and the companies affected suffer a massive blow to their reputation. Usually, it costs millions (if not billions) of dollars to clean up the mess left behind by a data breach or similar-scale cyberattack. The question is, do data breaches affect stock prices, and if so, can investors take advantage of this?

Why Data Breaches Hurt

There are a few reasons why data breaches are such a powerful negative force in the business world:

– Customer data and brand trust. First and foremost, a data breach could affect customer data. For example, when Target was attacked, millions of consumers’ credit card numbers were leaked. This impacts customers on an individual and personal level, causing some to be victims of identity theft. Even those who aren’t impacted will know how close they came to suffering from the mistake, and their trust in the brand will drop.

– Weakness and bad priorities. There are many types of cyberattacks that could feasibly affect a business, and it’s the responsibility of modern business owners to understand these threats and respond to them appropriately. It’s important for modern businesses to invest in a solid IT team, and make cybersecurity a top priority. An extra layer of cyber insurance wouldn’t hurt either. If a business suffers a hit, it probably means their priorities aren’t in order, which again can hurt the company’s reputation and earning potential.

– Direct costs. There are also direct costs associated with a breach. Companies are generally responsible for restoring order after the breach occurs, patching whatever holes in their security were responsible for the breach in the first place. They may also be responsible for a fine. For example, Equifax was recently fined $700 million for the lax standards that led to the reveal of personal information from 150 million Americans. With an annual revenue of $3.1 billion, that’s a non-negligible sum.

These reasons illustrate that a data breach realistically should affect a company’s stock price, at least in the short-term, but does it?

[Shutterstock: 380107090, scyther5]

[Shutterstock: 380107090, scyther5]

The Real Effects

Let’s look at the real effects a data breach has on stock prices by studying the two examples we’ve mentioned thus far: Target and Equifax. These are prominent public-facing companies, and their data breaches were extremely well-publicized, so they represent a kind of “worst-case scenario” for companies.

Target formally announced the breach on January 10, 2014, with CEO Gregg Steinhafel apologizing to customers in a televised interview January 13. The attack itself happened a few months earlier. Yet throughout the month of January, the price of the stock barely moved; it hovered around $75 a share, despite a temporary 10 percent drop. Currently, the stock sits at $104 a share. It’s hard to say whether it could have climbed higher had the breach not occurred, but it doesn’t appear that Target’s stock was significantly affected by the breach.

Equifax’s data breach occurred in summer of 2017, and the breach was discovered July 29. Its stock price wasn’t as fortunate; the stock dropped about 18 percent over the course of a few days and continued to have problems for some time. The approximate peak before the drop was $141 a share, and today, is $135, though it has exceeded $146 in the past year.

Other Factors to Consider

It’s also worth noting that while data breaches have a shaky effect on consumer confidence and generate bad publicity, they also don’t significantly affect the way a company does business. Once the security issue is resolved, the rest of the business can continue operating normally, generating revenue as it always has.

On top of that, the breaches we hear about tend to be the worst and most publicized. There are likely dozens, if not hundreds of significant breaches that unfold every year that we never hear about; companies are just too good at covering up that they happened, or else they act quickly enough that no real damage is done. These types of attacks necessarily have minimal impact on stock price.

The Bottom Line for Investors

Though data breaches can be bad for companies, they don’t tend to influence stock prices as sharply or as permanently as you might think. In the wake of a major, well-publicized breach, stock prices will likely plunge temporarily, but if you believe in the company’s fundamentals, you can simply treat this as a strong buying opportunity. If you hold a stock experiencing a data breach issue, it may be better to hold onto it, rather than reactively panic selling. Of course, this isn’t universal advice; some companies that suffer public data breaches may suffer much more than the examples we covered above.