Shareholder value implications of service failures in triads: The case of customer information security breaches |
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| Institution: | 1. College of Business and Innovation, University of Toledo, 2801 West Bancroft St., Toledo, OH 43606, United States;2. W. P. Carey School of Business, Arizona State University, 400 E. Lemon St., Tempe, AZ 85287, United States;3. Desautels Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montreal, QC, Canada H3A 1G5;1. Department of Design and Construction, Facilities Management, University of Maryland, United States;2. System Dynamics Group, Sloan School of Management, Massachusetts Institute of Technology, United States;3. Civil and Environmental Engineering Department, University of Maryland, United States;1. Kenan-Flagler Business School, University of North Carolina at Chapel Hill, McColl 4700, CB#3490, Chapel Hill, NC 27599-3490, USA;2. Scheller College of Business, Georgia Institute of Technology, 800 West Peachtree St. NW, Atlanta, GA 30308-0520, USA;3. College of Business, University of Louisville, Louisville, KY 40292, USA;4. Miller College of Business, Ball State University, 2000 W. University Ave., Muncie, IN 47306, USA;1. Michigan State University, Eli Broad College of Business, 632 Bogue Street N370, East Lansing, MI 48824, United States;2. Texas Christian University, Neeley Business School, PO Box 298530, Fort Worth, TX 76129, United States;3. University of Minnesota, Carlson School of Management, 321 19th Ave. S., Minneapolis, MN 55455, United States;1. School of Management, Huazhong University of Science and Technology, Wuhan 430074, China;2. Department of Industrial and Systems Engineering, National University of Singapore, Singapore;1. Business School, University of Mannheim, Schloss Schneckenhof Ost, 68131 Mannheim, Germany;2. Department of Management, Technology, and Economics, Swiss Federal Institute of Technology Zurich, Weinbergstrasse 56/58, 8092 Zurich, Switzerland;1. Koç University & Tilburg University, Koç University, Rumelifeneri Yolu, 34450 Sariyer, Istanbul, Turkey;2. University of Illinois, College of Business, 383 Wohlers Hall, 1206 South Sixth Street, Champaign, IL 61820, United States;3. Georgia Institute of Technology, Ernest Scheller Jr. College of Business, 800 West Peachtree Street NW, Atlanta, GA 30308, United States |
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| Abstract: | The rise in front-end service outsourcing in recent years, despite its advantages, has also exposed buyer firms to unique challenges. One of the most salient risks for buyer firms in service triads is service failure due to the service provider. Indeed such service failures may be more costly for firms due to the greater relational and operational costs that may arise from the presence of the third-party provider. Yet, neither the services literature nor extant operations literature on service triads has paid much attention to the financial consequences to the buyer firm – i.e., service risks – of such service failures in triads. To fill this gap, we investigate the financial penalty of service failures due to the service provider using the event study methodology and a sample of 146 customer information security breaches as our empirical context. Analysis of the abnormal returns reveals that service failures due to the front-end service provider lead to greater shareholder losses than such failures due to the buyer firm. This provides important new insight into the financial risks arising from outsourcing front-end services. Further, we investigate the ability of the buyer firm's employee and financial resources to temper these shareholder losses. We find that buyer firm employee productivity can moderate the greater financial penalty associated with such triadic service failures but that buyer firm leverage tends to not have such a mitigating effect. This provides new guidance for theory and practice regarding how buyer firms can position themselves to buffer the financial risks arising from service failures due to front-end service providers. |
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| Keywords: | Service triads Service recovery Information security breach Shareholder value Event study |
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