Shareholder Value Implications of Service Failures in Triads: The Case of Customer Information Security Breaches

Sachin Modi, McGill University
Michael A. Wiles, Arizona State University
Saurabh Mishra, University of Toledo

The rise in service outsourcing in recent years, despite its many advantages, has also exposed buyer firms to unique challenges. Particularly, inclusion of a third party front-end service provider to form a service triad can lead to a weakening in the position of the buyer firm. This becomes a significant concern in the face of service failures at front-end service providers, elevating the ex-post relational and operational costs of buyer firms and placing a downward pressure on their shareholder value. In this research, the authors investigate the shareholder value losses of one such type of unexpected service failure, i.e., customer information security breaches, and highlight how these losses to the buyer firms get magnified when the front-end service provider in a triad compromises the information. The authors also evaluate two critical resource positions of buyer firms, i.e., employee productivity and financial leverage, which can signal their ability to attenuate the negative fallout of information security breaches in service triads, and thus influence the shareholder value implications of such service failures. The results based on an event-study methodology provide important implications.

 

This is a working paper that is currently under review.