Fool Me Twice? Data Breach Reductions Through Stricter Sanctions

Abstract

Data breach notification laws in the United States mandate firms to take remedial actions when consumer data is compromised. Interestingly, the policies contained within these laws vary by state and by year of law enactment. We investigate the effects of the various policies to determine how firms respond to the implementation of data breach notification laws. Drawing upon institutional and deterrence theory, we hypothesize that firms facing stricter sanctions resulting from a data breach will experience fewer subsequent breaches in comparison to other firms. We create a unique panel data set using breach information collected between 2005 and 2016 to estimate several panel regressions with fixed effects. Our results show that policies that increase the costs associated with a data breach reduce a firm’s subsequent breaches by up to 50%, depending on the policy. Our findings are consistent across several robustness models and offer unique theoretical contributions to the information security literature as well as practical contributions to policymakers and security experts.