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Firm-level Resource Allocation to Information Security in the Presence of Financial Distress

Author

Listed:
  • Bin Srinidhi
  • Jia Yan
  • Giri Kumar Tayi

    (School of Economic Sciences, Washington State University)

Abstract

In this paper, we adopt an organizational perspective to the management of information security and analyze in a multi-period context how an organization should allocate its internal cash flows and available external funds to revenuegenerating (productive) and security assuring (protective) processes in the presence of security breach, borrowing and financial distress costs. We show analytically and illustrate numerically that the capital stock accumulation is lower and allocations to security are higher in the initial periods compared to the benchmark (no security breach) case, while in the long run, the steady state allocations do not differ. Further, we show that external insurance can be beneficial to both the firm and the provider and examine the cost parameters that affect the feasibility range. The results highlight the importance of resource allocation and insurance at the organizational level in addressing security breach problems and enable managers to seek and use relevant information effectively.

Suggested Citation

  • Bin Srinidhi & Jia Yan & Giri Kumar Tayi, 2008. "Firm-level Resource Allocation to Information Security in the Presence of Financial Distress," Working Papers 2008-17, School of Economic Sciences, Washington State University.
    • Handle: RePEc:wsu:wpaper:yan-1
    as

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    File URL: http://faculty.ses.wsu.edu/WorkingPapers/Yan/Srinidhi_Yan_GiriJune2008MISQ.pdf
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    References listed on IDEAS

    as
    1. Huseyin Cavusoglu & Birendra Mishra & Srinivasan Raghunathan, 2005. "The Value of Intrusion Detection Systems in Information Technology Security Architecture," Information Systems Research, INFORMS, vol. 16(1), pages 28-46, March.
    2. John Rust & Christopher Phelan, 1997. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Econometrica, Econometric Society, vol. 65(4), pages 781-832, July.
    3. Kjell Hausken, 2006. "Returns to information security investment: The effect of alternative information security breach functions on optimal investment and sensitivity to vulnerability," Information Systems Frontiers, Springer, vol. 8(5), pages 338-349, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Security Breach Costs; Financial Distress; Insurance; Resource Allocation.;
    All these keywords.

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