This article presents an economic model that determines the optimal amount to invest to protect a given set of information. The model takes into account the vulnerability of the information to a security breach and the potential loss should such a breach occur. It is shown that for a given potential loss, a firm should not necessarily focus its investments on information sets with the highest vulnerability. Since extremely vulnerable information sets may be inordinately expensive to protect, a firm may be better off concentrating its efforts on information sets with midrange vulnerabilities. The analysis further suggests that to maximize the expected benefit from investment to protect information, a firm should spend only a small fraction of the expected loss due to a security breach.

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This study examines the economic effect of information security breaches reported in newspapers on publicly traded US corporations. We find limited evidence of an overall negative stock market reaction to public announcements of information security breaches. However, further investigation reveals that the nature of the breach affects this result. We find a highly significant negative market reaction for information security breaches involving unauthorized access to confidential data, but no significant reaction when the breach does not involve confidential information. Thus, stock market participants appear to discriminate across types of breaches when assessing their economic impact on affected firms. These findings are consistent with the argument that the economic consequences of information security breaches vary according to the nature of the underlying assets affected by the breach.

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Abstract. This paper investigates whether entrepreneurs manipulate earnings in the periods prior to taking their flrms public through the choice of accounting conventions. The preponderance of evidence, using powerful accrual tests that were able to detect earnings management in other contexts, indicates little, if any, manipulation. To the extent that there is earnings management, the results suggest that this phenomenon is more pronounced among small firms and among firms with large finandal leverage and is to a lesser degree related to the quality of the underwriters and auditors employed when going public.Resume. Les auteurs ont voulu savoir si les entrepreneurs manipulaient les b£n€fices dans les exerdces pr£c^dant un appel public It l'^pargne par le truchement du choix des normes et conventions comptables. La preponderance des preuves recueillies h l'aide des puissantes techniques existantes de sondage des produits et des charges visant k d^celer les cas d'« accommodation » des b^n^fices dans d'autres contextes, revile une faible manipulation, sinon aucune. Dans la mesure oi) il y a accommodation des b^n^-fices, les resultats obtenus donnent It penser que le ph^nom^ne est davantage accentud chez les entreprises de petite taille ou dont le levier finander est ^lev^, et qu'il est reli6 de fa^on plus t^nue It la quality des preneurs fermes et des verificateurs k qui l'entrepdse a recours lorsqu'elle fait appel public h r^pargne.This study examines whether entreprenetirs systematically select accounting methods to increase reported income in the periods prior to going public. Asymmetry of information between the entrepreneur and outside investors concerning the value of initial public offerings (IPOs) is well recognized (e.g., Leland and Pyle