Home | Business News | Browse by Publication | J | Journal of Information Systems

Information transfer among Internet firms: the case of hacker attacks.

Article Excerpt
ABSTRACT: This study focuses on the stock market reaction to denial of service attacks against certain well-known Internet firms in February 2000. Investors appear to have used several heuristics in deciding which firms were "similar" to those attacked, and thus predicted that they were also likely to be attacked. The primary heuristic employed appears to have been similarity in reliance on the Internet to conduct operating activities (i.e., the set of Internet firms). We find negative mean abnormal returns among Internet firms not actually attacked (i.e., information transfer). This occurred both within Internet industries in which some firms were attacked, and within Internet industries with no attacks. A secondary heuristic appears to have been that Internet firms similar in size to those attacked (i.e., relatively large) were more likely to be attacked. In contrast to all other Internet industries, providers of Internet security products and services experienced positive mean abnormal returns.

I. INTRODUCTION

In the past decade a new type of business has emerged: the "Internet firm." Such firms operate in a variety of industries, but are similar in that they rely almost completely on information technology when conducting such fundamental operations as buying and selling goods and services. (1) When the technology fails, Internet firms literally cease to function for a period of time. (2) We examine investors' reactions to an event of this type: distributed denial of service (DOS) attacks launched by hackers against several of the best-known Internet firms in February 2000. The study investigates whether investors employed certain heuristics to decide which additional Internet firms were most likely to be harmed or helped by future attacks. In particular, we investigate whether those Internet firms not attacked experienced abnormal stock returns due to "information transfer."

Numerous prior studies have investigated stock market information transfers in other contexts (Foster 1981; Eckbo 1983; Bowen et al. 1983, Olsen et al. 1985; Baginski 1987; Han and Wild 1990; Firth 1996; Laux et al. 1998). An information transfer occurs when an information event for one firm (such as an earnings announcement) affects the share prices of other firms (Foster 1986). For example, if one firm announces lower-than-expected earnings, that firm is likely to experience negative abnormal returns. Moreover, similar firms are likely to experience simultaneous abnormal returns. The returns would be positive if investors believe that bad news for one firm implies good news for others (a competition effect). Alternatively, the returns would be negative if investors believe that bad news for one firm implies bad news for others (a contagion effect) (Laux et al. 1998). Information transfer occurs among firms whose economic prospects are interrelated. Prior research has found this interrelatedness exists among firms in the same industry. (3)

There is no universally accepted definition of an industry. Industries have been defined using the following attributes among others: "similarity in raw material usage; similarity in production process; similarity in end product as perceived by consumers; similarity in end consumer group." (See Foster 1986, 187.) Although Internet firms are commonly treated as a meaningful set by the business press (Pfeiffer 2000a, 2000b) and by academics (Trueman et al. 2000), none of the above criteria appear to warrant viewing Internet firms as a single industry. We propose that investors view Internet firms as interrelated due to their reliance on information technology to conduct basic operations. We investigate whether such a decision heuristic appears to play a role in information transfer among Internet firms rather than (or in addition to) industry membership. If so, then reliance on information technology constitutes a meaningful economic dimension for characterizing Internet firms that is orthogonal to traditional industry boundaries.

Studies of information transfer usually seek to identify (1) sample firms that have interrelated prospects, and (2) information events that are value-relevant for firms directly affected. These conditions provide a favorable setting for tests whether the events studied are value relevant for sample firms not directly affected--that is, to test whether information transfer occurs. Usually the goal is to learn more about the value implications of the events examined, or about the information efficiency of the stock market. The value relevance of the events studied in this paper (the DOS hacker attacks) is fairly straightforward for firms actually attacked, and market efficiency can be assumed. Our goal is to learn more about the market's view of the relatively new phenomenon of Internet firms. We test a theory of the collective nature of Internet firms: observers perceive them to be interrelated because of their common reliance on information technology, and their consequent exposure to its risks and rewards. This view implies that, among Internet firms, information transfer is likely to transcend industry boundaries.

We investigate the stock market reactions for two samples of Internet firms: those attacked (based on news reports) and those not attacked. Not surprisingly, the former set of firms experienced negative abnormal returns. Our interest centers on the latter set of firms. These firms belong to a variety of industries. (4) We find that information transfer (negative mean abnormal returns) occurred among firms in those industries in which some firms were attacked. We also find that information transfer occurred across industry lines: abnormal returns occurred in industries where no firms were attacked. The mean abnormal returns generally were negative and significant in these industries. We find that information transfer is no stronger within industries in which firms were attacked than within Internet industries not attacked. Apparently, reliance on information technology is as important as industry membership in assessing the likelihood of future attacks. Internet firm size appears to play a role in information transfer; larger firms are considered more likely to be targets of...

View this article FREE - Now for a Limited Time, try Goliath Business News
Free for 3 Days!