Martin P. Loeb Directory Page

Martin P. Loeb

Martin P. Loeb

Professor of Accounting and Information Assurance

Deloitte & Touche Faculty Fellow

Ph.D. in Managerial Economics and Decision Sciences, Northwestern University’s Kellogg School of Management


4333L Van Munching Hall

Martin Loeb is a professor of Accounting and Information Assurance and a Deloitte & Touche Faculty Fellow in the Robert H. Smith School of Business at the University of Maryland, College Park. He is also an affiliate professor in the University of Maryland Institute for Advanced Computer Studies (UMIACS). Loeb received his Ph.D. from the Managerial Economics and Decision Sciences (MEDS) group at Northwestern University's Kellogg School of Management. He received a BS in mathematics and economics from the Stony Brook University.

Loeb's early research was in economic mechanism design, incentive regulation, cost allocations, and cost-based procurement contracting. His current research deals with economic aspects of information security, the interface between managerial accounting and information technology, and the effect of regulation on cybersecurity, internal controls and disclosure.

Loeb's papers span several business disciplines, and have been published in leading academic journals, including:

  • The Accounting Review
  • ACM Transactions on Information and System Security
  • American Economic Review
  • Contemporary Accounting Research
  • Journal of Accounting Research
  • Journal of Computer Security
  • Journal of Law and Economics
  • Journal of Public Economics
  • Journal of Accounting and Public Policy
  • Management Science
  • MIS Quarterly

Gordon, L. A., M.P. Loeb and L. Zhou, “Information Segmentation and Investing in Cybersecurity,” Journal of Information Security , Vol. 12, No. l, 2021. This paper provides an analysis of how the benefits of information segmentation can facilitate cost-effective cybersecurity investment decisions.

Gordon, L. A., M. P. Loeb and L. Zhou , “Integrating Cost-Benefit Analysis into the NIST Cybersecurity Framework via the Gordon-Loeb Model,” Journal of Cybersecurity, Vol.6, No.1, 2020. This paper shows how to select the NIST Implementation Tier Level via Cost-Benefit Analysis.

Gordon, L. A., M. P. Loeb, W. Lucyshyn and L. Zhou, “Empirical Evidence on the Determinants of Cybersecurity Investments in Private Sector Firms,” Journal of Information Security, Vol. 9, 2018. This paper shows that treating cybersecurity as an important component of a firm’s internal control system serves as a key driver for private sector firms to invest in cybersecurity activities.

Bodin, L., L.A. Gordon, M.P. Loeb and A. Wang , “Cybersecurity Insurance and Risk Sharing,” Journal of Accounting and Public Policy, Vol. 37, No. 6, 2018. This paper provides a model for selecting the optimal number of insurance policies by a firm, given a finite number of policies available from one or more insurance companies.

Gordon, L.A., M.P. Loeb, and L. Zhou, “Investing in Cybersecurity: Insights from the Gordon-Loeb Model,” Journal of Information Security, March 2016. This paper explains how organizations could use, based on four simple steps, the Gordon-Loeb Model to derive their appropriate level of cybersecurity investments.

Gordon, L.A., M.P. Loeb, W. Lucyshyn, and L. Zhou, “ Increasing Cybersecurity Investments in Private Sector Firms,” Journal of Cybersecurity, Vol. 1, No. 1., 2015. This paper provides an economics-based framework for assessing the impact of government incentives/regulations on private sector cybersecurity investments. (In 2016, NSA awarded this paper Honorable Mention for its contribution to the cybersecurity literature.)

Gordon, L.A., M.P. Loeb, W. Lucyshyn, and L. Zhou, “The Impact of Information Sharing on Cybersecurity Underinvestment: A Real Options Perspective,” Journal of Accounting and Public Policy, Vol. 34, No. 5, 2015. This paper demonstrates how information sharing could encourage firms to take a more proactive approach toward cybersecurity investments based on a real options perspective of cybersecurity investments.

Gordon, L.A., M.P. Loeb, W. Lucyshyn, and L. Zhou, “Externalities and the Magnitude of Cybersecurity Underinvestment by Private Sector Firms: A Modification of the Gordon-Loeb Model,” Journal of Information Security, January 2015. This paper extends the Gordon-Loeb Model to incorporate externalities in deciding on the appropriate level of cybersecurity investment.

Gordon, L.A., M.P. Loeb, and W. Lucyshyn, “Cybersecurity Investments in the Private Sector: The Role of Governments,” Georgetown Journal of International Affairs, Oct. 2014. This paper discusses the problems associated with private sector cybersecurity investments and ways that governments can address these concerns.

Gordon, L.A., M.P. Loeb, and L. Zhou, “The Impact of Information Security Breaches: Has there been a Downward Shift?,” Journal of Computer Security, Vol. 19, No. 1, 2011. This paper shows that information security breaches have had a significant impact on the stock market returns of some firms, but there has been a significant downward shift in the impact of such breaches in the sub-period following 9/11/2001.

Gordon, L.A., M.P. Loeb and T. Sohail, “Market Value of Voluntary Disclosures Concerning Information Security,” MIS Quarterly, Vol. 34, No.3, 2010. This paper provides evidence that voluntary disclosures concerning information security, in 10-K Reports filed with the SEC, are positively associated with the stock market value of firms.

Gordon, L. A., M. P. Loeb, T. Sohail, C-Y Tseng, and L. Zhou, “Cybersecurity, Capital Allocations and Management Control Systems,” European Accounting Review, Vol. 17, No. 2, 2008. This paper shows that firms can use an information security audit to mitigate a CISO’s inherent empire building preferences.

Bodin, L., L.A. Gordon and M.P. Loeb, “Information Security and Risk Management,” Communications of the ACM, Vol. 51, No. 4, 2008. This paper discusses three measures of information security risk and proposes a methodology to combine these different risk measures into a single composite metric.

Gordon, L.A., M.P. Loeb , W. Lucyshyn and T. Sohail, “The Impact of the Sarbanes-Oxley Act on the Corporate Disclosures of Information Security Activities,” Journal of Accounting and Public Policy, Vol. 25, No.5, 2006. This paper provides evidence that SOX had a significant impact on the information security activities of firms.

Gordon, L.A. and M.P. Loeb, “Budgeting Process for Information Security Expenditures,” Communications of the ACM , January 2006. This paper provides empirical evidence on the way senior information security managers budget for information security expenditures.

Bodin, L., L.A. Gordon and M.P. Loeb, “Evaluating Information Security Investments Using the Analytic Hierarchy Process,” Communications of the ACM, February 2005. This paper shows how to apply the Analytic Hierarchy Process (AHP) to determine the best way to allocate information security funds.

Gordon, L.A., M.P. Loeb and W. Lucyshyn, “Sharing Information on Computer Systems Security: An Economic Analysis,” Journal of Accounting and Public Policy , Vol. 22, No. 6, 2003. This paper presents a model showing that firms and society may benefit from sharing information concerning security breaches. However, without appropriate economic incentives, firms will attempt to free-ride on the security expenditures of other firms.

Campbell, K., L.A. Gordon, M.P. Loeb and L. Zhou, “The Economic Cost of Publicly Announced Information Security Breaches: Empirical Evidence from the Stock Market,” Journal of Computer Security, Vol. 11, No. 3, 2003. This study examines the economic effect of information security breaches on the stock market value of corporations.

Gordon, L.A., M.P. Loeb and W. Lucyshyn, “Information Security Expenditures and Real Options: A Wait-and-See Approach,” Computer Security Journal, Vol. 19, No. 2, 2003. This paper shows that the wait-and-see approach toward information security expenditures is consistent with a real options view of capital budgeting.

Gordon, L.A., M.P. Loeb and T. Sohail, “A Framework for Using Insurance for Cyber Risk Management,” Communications of the ACM, March 2003. This paper examines the unique aspects associated with cyber risk and presents a framework for using insurance as a tool for helping to manage information security risk.

Gordon, L.A. and M.P. Loeb, “The Economics of Information Security Investment,” ACM Transactions on Information and System Security, November 2002. This paper presents an economic model that characterizes the optimal investment to protect a given set of information. It is shown that the optimal amount to spend to protect an information set does not always increase with increases in the information set’s vulnerability. Based on the model (i.e., known as the Gordon-Loeb Model), it is shown that the amount a firm should spend to protect information sets should generally be only a small fraction of the expected loss.

Gordon, L.A. and M.P. Loeb, “Return on Information Security Investments: Myths vs. Reality,” Strategic Finance, November 2002. This paper shows that the accounting rate of return on investments is inappropriate for the evaluation of information security projects.

Gordon, L.A. and M.P. Loeb, “Economic Aspects of Information Security,” Tech Trends Notes, Fall 2001. This paper provides an economic framework for looking at the allocation of resources to information security activities. A major argument of this paper is that expenditures on information security need to be considered in cost-benefit terms.

Gordon, L.A. and M.P. Loeb, “A Framework for Using Information Security as a Response to Competitor Analysis Systems,” Communications of the ACM, September 2001. This paper provides a framework for using information security as a response to rivals’ competitor analysis systems.

Gordon, L.A. and M. P. Loeb, “Expenditures on Competitor Analysis and Information Security: A Management Accounting Perspective,” in Management Accounting in the Digital Economy (Oxford University Press), A. Bhimani (ed.), 2003. In this paper, a game-theoretic model of a market shared by two rivals is analyzed to shed light on how expenditures on competitor analysis affect, and are affected by, expenditures on information security.

Groves, Theodore and Martin Loeb, “Incentives and Public Inputs,” Journal of Public Economics, August 1975, pp. 211-226. (reprinted in Thirty Five Years of MEDS and Management Theory: 65th Birthday Celebration of Morton I. Kamien , (Kellogg School of Management, Evanston, IL) S. Chopra, A. Raviv, and r. Vohra (eds.) 2003, pp. 66-81.

This paper proposes and anlayzes a mechanism (which has been subsequently referred to as the Groves mechanism, the Groves-Loeb scheme, the demand-revealing mechanism, and the Vickery-Clarke-Groves, or merely, VCG mechanism) to coordinate the decision to provide a public input to a group of firms designed to overcome the free-rider problem. The coordinating agent relies on information communicated by the firms and it is shown that the mechanism provides an incentive for each firm to send truthful information so that an optimal quantity of the public input will be provided.

Groves, Theodore and Martin Loeb , “Reflect­ions on ‘Social Costs and Benefits and the Transfer Pricing Problem’,” Journal of Public Economics, April-May 1976, pp. 353-359.

The informational incentive properties of a scheme proposed by Ronen to ensure efficient allocations in the presence of interfirm externalities are examined. While sending accurate information is a non-cooperative (Nash) equilibrium in the game defined by Ronen's scheme, it is not the only such equilibrium. Others such that all firms are better off and such that inefficient allocations result also exist. We show that under a scheme we proposed elsewhere, such possibilities are eliminated. Our scheme is similar to Ronen's, but differs in two essential respects detailed in the paper.

Loeb, Martin and Wesley A. Magat , “Success Indicators in the Soviet Union: The Problem of Incentives and Efficient Allocations,” American Economic Review, March 1978, pp. 173-181.

In this paper, it is shown that the set of success indicators proposed by Ellman (1971), Fan (1975), and Weitzman (1976) is actually the subset of one another. Specifically, the set of Fan success indicators is a subset of the Ellman indicators, which in turn comprise a subset of the Weitzman indicators. The paper then shows that using the success indicators studied by Fan, Ellman, and Weitzman, enterprises can individually gain by transmitting inaccurate forecasts, to the detriment of society as a whole. This undesirable incentive property comes from the failure to explain how the Central Planning Bureau (CPB) uses the forecast submitted by enterprises in their model. The model proposed in this paper corrects this failure. It recognizes that the CPB uses forecasts to make allocations and allow enterprises to take this knowledge into account when sending forecast to the CPB. The new success indicator presented could motivate accurate forecasts and efficient behavior.

Loeb, Martin, “Alternative Versions of the Demand-Revealing Process,” Public Choice, Special Supplement to Spring 1977, pp. 15-26.

The paper unifies the various approaches to the demand-revealing process. The versions of Clarke, Groves and Loeb (1975), and Groves and Ledyard (1977) focus on the free-rider problem for public goods. Earlier papers of Vickrey (1961) and Groves (1973) apply the demand-revealing process to the allocation of private goods. Tideman and Tullock (1976) discuss applications to voting problems as well as applications designed for allocating public goods. Groves (1976) deals with the problem of interfirm externalities and Loeb (1975) suggests the use of a demand-revealing process for control in large organizations. In this paper, the essential features of all the versions are examined.

Groves, Theodore and Martin Loeb, “Incentives in a Divisionalized Firm,” Management Science, March 1979, pp. 221-230.

This paper was among the first to apply the mechanism design approach to problems of coordinating and controlling divisions of a large firm. The model explicitly considers incentive compatibility issues in applying the mechanism presented in Groves and Loeb (1975) to problems of internal allocation of resources. With the proposed evaluation measure, each division manager is rewarded on the basis of the division’s contribution to overall profits. If the division’s message to the center has no impact on the center’s coordinating decisions, then the manager is evaluated on the basis of the division’s realized profits. If the division’s message changes the coordinating decision, then the manager is evaluated on the basis of the division’s realized profits less the reported impact of the change in the coordinating decisions (resulting from the message) on the profits of the other divisions.

Loeb, Martin and Wesley A. Magat, “A Decentralized Method of Utility Regulation,” Journal of Law and Economics, October 1979, pp. 399-404. (reprinted in Spanish translation in Teoria de Incentivos y sus Aplicaciones a Regulacion de Empresas y Subastas )

This paper uses the mechanism design approach to examine the problem of utility regulation. A new institutional arrangement that mixes regulation and franchising is proposed. Under the proposed system, the utility chooses its own price and the regulatory agency subsidizes the utility on a per unit basis equal to the consumer surplus at the selected price. Such system not only solves the allocative efficiency problem, but also encourages efficient operation. The most distinguishable feature of the present system perhaps is that it requires no action by the regulatory agency if underlying cost conditions change. While both rate-of-return regulation and a franchise arrangement would require action from a regulatory or administrative agency if underlying cost conditions change, the price-setting decentralization system proposed here could help avoid such action from regulatory agency so as to reduce regulatory lag.

Cohen, Susan I. and Martin Loeb, “The Groves Scheme, Profit Sharing, and Moral Hazard,” Management Science, January 1984, pp. 20-24.

Considered in this paper is the problem of intrafirm resource allocation. The Groves scheme has been presented in the literature (e.g., Groves and Loeb, 1979) as a way of dealing with intrafirm resource allocation decisions within a model that explicitly recognizes asymmetric information, but does not explicitly consider the moral hazard problem. The analysis in this paper allows for the problem of moral hazard (effort aversion) as well as the problem of asymmetric information and shows that for a deterministic case in which the headquarters seeks to maximize a measure of total profits gross of divisional rewards, a reinterpreted Groves scheme will yield a dominant equilibrium. At this equilibrium, the headquarters implicitly considers the division manager's effort levels as a cost to the firm. Properties of profit sharing are also examined.

Loeb, Martin, “Comments on Budget Forecasting and Operating Performance,” Journal of Accounting Research, Autumn 1974, pp. 362-366

This paper demonstrates that performance measures proposed by Ijiri, Kinard, and Putney (1968) may actually encourage dysfunctional behavior. One performance measure designed to evaluate a responsibility (profit) center is shown to penalize the center for taking certain profit-maximizing decisions. A second performance measure designed for use in negotiated procurement contracts is shown to reward the contractor for poor forecasts. Alternative performance measures are given which are consistent with the motivation of accurate forecasting and operating efficiency.

Loeb, Martin and Wesley A. Magat, “Soviet Success Indicators and the Evaluation of Divisional Management,” Journal of Accounting Research, Spring 1978, pp. 103-121.

The paper aims at integrating the research on Soviet success indicators with the study of budget-based performance metrics in the accounting literature, and suggesting a new indicator for use in properly motivating enterprise or divisional management. It shows that, unfortunately, the Soviet success indicators motivate biased forecasts when these forecasts are used by central planners (corporate headquarters) to allocate capital among enterprises (divisions). The paper presents an alternative success indicator which motivates both accurate forecasts and efficient operating behavior. With the profit-sharing indicator, a manager's evaluation depends both on all other divisions' forecasts and on their realized profits; with the alternative indicator a manager's evaluation is independent of other divisions' realized profits. The paper also shows that no indicator truly “solves” the problem of fully allocating total firm profits while also motivating divisions to report truthful forecasts, regardless of the forecasts of other divisions.

Gordon, L. A., M. P. Loeb and A. W. Stark, “Capital Budgeting and the Value of Information,” Management Accounting Research, March, 1990, pp.21-35.

Conventional wisdom related to capital budgeting suggests that providing a project sponsor with an improved cash flow forecasting system should lead to higher firm value. Recent agent theoretic work related to the value of an information system makes such wisdom suspect. However, such work has implicitly assumed that, where communication between the subordinate and superior is allowed, it is used by the superior for control purposes only. We show that the value of providing a subordinate (e.g., project sponsor) with a new information and communication system is unclear even in a case where a superior (e.g., central management) uses communication for planning as well as control purposes. We also identify necessary and sufficient circumstances under which it is not beneficial to the superior to provide the subordinate with a new information and communication system under previous agency theoretic work, but is beneficial under our expanded analysis.

Loeb, Martin P. and Krishnamurthy Surysekar, “On the Optimality of Cost-Based Contracts in Sole Source Procurement,” Management Accounting Research, March 1994, pp. 31-44.

This paper focuses on the optimality of a purchaser using ex-post costs in compensating a supplier in the context of sole source procurement. Traditional agency work has shown that, under certain conditions, it may be optimal for an agent to be held responsible for uncontrollable outcomes. In this paper, limiting conditions are examined under which it would not be optimal for the purchasing firm to base the payment to the supplier on perfectly observable actual costs, even though the supplier has considerable control over these costs. It is also shown that the relative severity of the moral hazard and adverse selection issues leads to the relative domination of the fixed price contract and the cost-plus contract and that the optimal linear procurement contract approaches a fixed price (cost-plus) contract as the adverse selection problem decreases (increases) relative to the moral hazard problem.

Loeb, Martin P. and Krishnamurthy Surysekar, “Cost-plus Fixed Fee Contracts with Payment Ceilings: Impact on Commercial Markets and Indirect Cost Recoveries,” Journal of Accounting and Public Policy, Fall 1997, pp. 245-269.

Considered is a monopolist selling one product to a commercial market and a related, but distinct, product to the government. In the absence of sales to the government, the usual welfare loss associated with too little quantity being sold at too high a price arises. Using an agency model, the welfare consequences of using a cost-plus contract for procurement are examined. We show that such a contract exacerbates the welfare loss in the commercial market due to cost shifting motivated by cost allocation. We then turn attention to the use of a payment ceiling in connection with a cost-plus contract. Here we show that the payment ceiling reduces the welfare loss in the commercial market by motivating the monopolist both to increase commercial output and to lower the price. Additionally, the use of a payment ceiling is seen to reduce the moral hazard problem associated with cost-plus contracts.

Loeb, Martin P. and Krishnamurthy Surysekar , “Payment Ceilings in Cost-Plus Contracting” Management Accounting Research, Vol. 9, 1998, pp. 311-327.

Cost-plus procurement contracts are widely used by the government. Although prior studies have recognized that payment ceilings are a common element in cost-plus procurement contracts, these studies have not examined the endogenous determination or the welfare effects of such ceilings. In this paper, a simple agency model is used to examine the optimal level of a payment ceiling in the context of cost-plus contracting in sole source procurement. It is demonstrated that the optimal cost-plus contract with payment ceiling dominates the optimal cost-plus contract without ceiling. This is because the use of a payment ceiling has two benefits. First, the payment ceiling serves as a de facto means of delegating the decision as to whether or not the project should proceed. Thus, the contract with payment ceiling takes advantage of the supplier's private information. Second, the payment ceiling, along with the optimal choice of the fixed fee, helps to mitigate moral hazard problems associated with cost-plus contracting.

Loeb, Martin P. and Krishnamurthy Surysekar, “Payment Ceilings and Incentive Contracting for Sole Source Procurement” Advances in Quantitative Analysis of Finance and Accounting, Volume 8, 2000, pp. 101-122.

Although payment ceilings are a common feature of cost-based procurement contracting, literature examining the role of such ceilings is quite limited. This paper investigates the interaction among the optimal levels of a cost sharing parameter, a fixed payment parameter, and a ceiling parameter of a linear procurement contract with payment ceiling. The introduction of a payment ceiling to a linear contract generally has a number of effects on decision-making of a risk-neutral purchaser and a risk-neutral supplier. The introduction of the payment ceiling provides the purchaser with an additional tool to handle the adverse selection problem arising from the private information on cost held by the supplier. A measure of the variance of a zero-mean shock term now affects the decisions of the purchaser and supplier, as the payment ceiling makes the risk-neutral supplier's expected payoff concave. It is also shown that the purchaser may optimally set the ceiling at a level that may be more or less than the exogenously specified level of expected benefits from the project. Examples are provided in which the purchaser is strictly better off with the payment ceiling, although the ceiling may not always bind. The additional benefits to the purchaser of having a ceiling can exceed the information rents earned by the supplier in the model without the ceiling.

Gordon, Lawrence A., Martin P. Loeb, and Chih-Yang Tseng, “Capital Budgeting and Informational Impediments: A Managerial Accounting Perspective.” Chapter in Contemporary Issues in Management Accounting (Oxford University Press), A. Bhimini (ed.), 2006, pp. 146-165.

This paper reviews the capital budgeting literature around the theme of information impediments and discuses directions for future research. Three related streams in the capital budgeting literature, (1) the use of sophisticated methods for selecting capital investments (2) asymmetric information, and (3) post-auditing of capital investments, are viewed through the information impediments lens.

Cohen, Susan I. and Martin Loeb, “Public Goods, Common Inputs and the Efficiency of Full Cost Allocations,” The Accounting Review, April 1982, pp. 336-347.

This paper addresses the simultaneous problems of determining input levels in a multidivisional firm and allocating the input costs to the divisions. A distinction analogous to that in economics between pure public goods and pure private goods is made between pure common inputs and pure private inputs. It is shown that for a pure common input, decentralization utilizing a full cost allocation can result in an efficient allocation of the input. Although efficient decentralization is possible in this case, the free-rider problem suggests that such an outcome is unlikely. In addition, it is shown that recently suggested allocation schemes base on game-theoretic concepts may not lead to an efficient allocation of pure common inputs.

Cohen, Susan I. and Martin Loeb, “Improving Performance Through Cost Allocations,” Contemporary Accounting Research, Fall 1988, pp. 70-95.

This paper considers an intrafirm resource allocation model with a single principal and n agents. Each agent represents a division manager who uses a centrally provided input together with other inputs, including effort, to produce and sell final products. The principal represents an owner who is responsible for providing an input to the divisions. It is assumed that each agent (division manager) knows the local profit function for the division and has disutility for effort. The principal seeks to maximize firm-wide profits net of the costs of the centrally provided input and compensation to the agents. In this setting, which incorporates divergence of preferences and asymmetric information, it is shown that the principal and the n agents can strictly improve their welfare by moving from a set of compensation functions that do not include any allocation of costs to compensation functions that are based on cost allocation.

Cohen, Susan I. and Martin P. Loeb, “The Demand for Cost Allocations: The Case of Incentive Contracts versus Fixed-Price Contracts,” Journal of Accounting and Public Policy, Fall 1989, pp. 165-180.

The question of why firms allocate costs for internal reporting has been brought to the forefront of accounting research. This cost allocation literature focuses on finding settings in which cost allocations arise as a part of optimal contracting, under conditions of asymmetric information and divergence of preferences. This paper presents a setting in which cost allocations are part of the optimal contract between the government and a firm supplying goods to the government. Conditions are provided under which an incentive contract (based on fully allocated costs) dominates a fixed-price contract (in which no allocation takes place) in the context of a bidding model for government procurement. It is shown that incentive contracts can dominate fixed-price contracts even when the government and potential suppliers are all risk-neutral, and thus when there are no benefits from risk-sharing per se. Thus, we provide an economic rationale for cost allocation.

Cohen, Susan I. and Martin Loeb, “Implicit Cost Allocation and Bidding for Contracts,” Management Science, September 1990, pp. 1133-1138.

The question of how, or even whether, indirect costs should be allocated for pricing decisions has been controversial and unresolved. This paper takes a step toward answering this question by examining the special case of a firm that must incur incremental fixed costs to complete any or all of the several projects for which it is submitting simultaneous bids. An independent private-values bidding model is employed to endogenously determine an optimal cost allocation; we term such a cost allocation “implicit.” The optimal implicit fixed cost allocation is shown to fully allocate fixed costs ex ante, although the fixed costs may be under, over, or exactly allocated ex post.

Cohen, Susan I. and Martin P. Loeb, “On the Optimality of Incentive Contracts in the Presence of Joint Costs,” International Journal of Industrial Organization, September 1990, pp. 405-416.

Firms that supply goods to the government often produce these goods in conjunction with other goods, incurring joint or common production costs. When the government uses costs as a basis for contracting with such firms, questions of cost allocation naturally arise. This paper presents, in the context of a bidding model, conditions under which a fixed-price contract is optimal (in the class of linear contracts) for the government. Under these conditions the problem of cost allocation is totally avoidable.

Cohen, Susan I., Martin P. Loeb, and Andrew W. Stark, “Separating Controllable Performance from Noncontrollable Performance: The Case of Optimal Procurement Contracting,” Management Accounting Research, December 1992, pp.291-306.

Recent research has refined the notion that a manager's evaluation should be based only on controllable measures of performance. In this paper, issues concerning contract form and controllability are addressed in the context of a procurement model based on that of McAfee and McMillan (Rand Journal of Economics, 17; 1986). A linear incentive contract that depends on: (1) an imperfect signal of non-controllable costs; and (2) total costs, is shown to Pareto dominate a contract based on total costs alone. Thus, some theoretical justification for the use of cost escalation clauses is demonstrated. It is shown that as observability of the non-controllable costs increases, the form of the optimal contract moves closer to a fixed-price contract, and the expected utility of both the purchaser and potential suppliers increases. Hence, a complete ranking for a class of costless post-decision information systems is provided. Separating out some of the non-controllable costs allows better risk-sharing and lets the purchaser sharpen the trade-off between the incentives to deal with the hidden action problem versus the hidden information problem.

Aharony, Joseph, Chan-Jane Lin and Martin Loeb, “Initial Public Offerings and Earnings Management,” Contemporary Accounting Research, Fall 1993, pp 61-81.

This paper investigates whether entrepreneurs manipulate earnings in the periods prior to taking their firms 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 financial leverage and is to a lesser degree related to the quality of the underwriters and auditors employed when going public.

Gordon, Lawrence A., Martin P. Loeb, and Mary Myers, “A Note on Postauditing Capital Assets and Firm Performance,” Managerial and Decision Economics, March-April 1994, pp. 177-181.

The note tries to determine whether the results of Myers, Gordon, and Hamer (1991) would hold up when firm performance is evaluated with various accounting rate of return. Myers et al, using a market-based measure of performance, Tobin's q, shows that, among firms having a q value less than one, the initiation of a sophisticated postauditing system for the evaluation of capital assets significantly improved the q value. This study shows that, using the same sample of firms as used in the Myers et al study, the same time period, and the same statistical procedures, such significant positive effect still holds up when using several different accounting rate of return to measure firm performance.

Coate, Charles J. and Martin P. Loeb, “Audit Pricing, Auditor Changes, and the Winner’s Curse,” The British Accounting Review, December 1997, pp. 315-335.

This paper presents a two-period model of the audit market. In the first period, all auditors have symmetric information and adopt identical bidding strategies. In the process of performing the audit, the incumbent auditor learns the actual costs, thereby becoming informationally advantaged in the second period. In the model presented, unlike earlier ones found in the literature, audit costs include both a component common to all potential auditors and a private component that varies across auditors. The common component of auditor costs gives rise to a ‘winner's curse’ scenario. A winner's curse is said to exist because a non-incumbent bidder who does not take into account the superior information of the incumbent would be expected to generate a loss from winning the audit engagement. The adjustment of bids by sophisticated auditors to compensate for the winner's curse is shown to play a significant role in determining the degree of low-balling (first-period price cuts) and auditor turnover. In the model, low-balling is not associated with loss of audit quality. Additionally, it is shown that it is in the interest of the client to structure audit selection in a manner that gives rise to low-balling.

Sechoul Park, H. Jonathan Jang, and Martin P. Loeb, “Insider Trading Activity Surrounding Annual Earnings Announcements,” Journal of Business Finance and Accounting , June 1995, pp. 587-614.

The paper contributes to the literature by developing and testing a model of insider trading behavior around the release of annual earnings information. The study hypothesizes that utility maximizing insiders with private information concerning annual earnings will increase their trading activity several weeks prior to the public release of earnings but will refrain from trading in the period immediately preceding the earnings release. The empirical analysis, using an event study methodology, is generally consistent with the predicted behavior.

Aharony, Joseph and Martin Loeb, “Mean-Variance vs. Stochastic Dominance: Some Empirical Findings on Efficient Sets,” Journal of Banking and Finance, June 1977, pp. 15-26.

The study attempts to shed additional light on the issue of the costs and benefits of using the mean-variance criterion as opposed to stochastic dominance criteria for investment decisions. Relevant probabilities which facilitate measurement of these costs and benefits are identified. The mean-variance criterion is shown to be useful to some extent in identifying potentially optimal portfolios. However, it is shown that the informationally less demanding mean-variance criterion admits two types of errors: (i) including portfolios that no expected utility maximizing risk averters would choose, and (ii) excluding portfolios which some risk averters would find optimal. The empirical investigation also indicates that although the composition of the efficient sets appears to be unstable over time, the relationships between the efficient sets are persistent over time.

Gordon, Lawrence A. and Martin P. Loeb , “The Y2K Boon to IS and Business,” Information Systems Management Journal, Summer 1999, pp. 57-62.

Based on an empirical study of Fortune 500 companies, this paper provided evidence that supports the argument that corporations were going to be ready for 2000. Additionally, the paper provide evidence that supported an argument, based on the economic theory originally exposed by Joseph Schumpeter, that the Millennium-bug would trigger significant benefits.

Gordon, Lawrence A. and Martin P. Loeb, “Distinguishing Between Direct and Indirect Costs is Crucial for Internet-Based Companies,Management Accounting Quarterly, Summer, 2001, pp.12-17. (awarded Honorable Mention for 2001 by Institute for Management Accountants and reprinted in Readings in Management Accounting by M. Young, Prentice-Hall)

People who argue that distinguishing between direct and indirect costs is of no relevance in today's Information Economy are dead wrong! Indeed, the importance of the direct vs. indirect costs dichotomy (as well as with many other management accounting techniques) may be even more crucial to an Internet-based firm's survival than to other companies. The key paradigm shift here is that, when separating direct from indirect costs, we need to think of customers as a primary cost objective in such an environment.

CSI/FBI Computer Crime And Security Surveys

Martin Loeb is one of the authors of the 2004, 2005 and 2006 CSI/FBI Computer Crime and Security Surveys. The Computer Crime and Security Survey was conducted by the Computer Security Institute (CSI) with the participation of the San Francisco Federal Bureau of Investigation's (FBI) Computer Intrusion Squad. The aim of this effort is to raise the level of security awareness, as well as help determine the scope of computer crime in the United States.

Gordon, Lawrence A. and Martin P. Loeb, Managing Cybersecurity Resources: A Cost-Benefit Analysis, McGraw-Hill, New York, 2006.

This book provides a guide for managers dealing with the economic and financial aspects of information security. It is intended to be a valuable resource for information security managers and other IT personnel seeking to attain additional organizational recourses for information security. Topics covered include a general economic cost-benefit framework for managing cybersecurity resources and risk, assessing the actual costs of cybersecurity breaches, preparing a business case for securing information security funding, the uses of security audits, and the role of cybersecurity in national security. In addition to its use to information security managers, this book should also prove valuable to instructors and students in university courses covering financial and economic aspects of information security.


  • Guest Co-editor (with A. Bhimani, S. Carmona, and L. Gordon) of Special Issue on Limits of Accounting Regulation, Journal of Accounting and Public Policy 2019
  • Editor, Journal of Accounting and Public Policy 2001-2018
  • Guest Co-editor (with L. Gordon) of Special Issue on information security investments, Journal of Information Security 2015
  • Guest Associate Editor of MIS Quarterly, 2010 special issue on “Information Systems Security in a Digital Economy,”
  • Guest Co-editor (with L. Gordon) of Special Issue on the economic aspects of information security, Journal of Information Systems Frontiers 2007

Editorial Board Member

  • The Accounting Review, 1989 -1993.
  • Journal of Accounting and Public Policy, 2000-2001
  • Review of Accounting Studies, 1993-1999
  • Journal of Business Finance and Accounting, 2001-2007
  • The British Accounting Review, 1994-1998

Ad Hoc Reviewer

  • Abacus
  • Accounting Horizons
  • American Economic Review
  • British Accounting Review
  • Communications of the ACM
  • European Accounting Review
  • IEEE Security and Privacy
  • IEEE Transactions on Dependable and Secure Computing
  • Information Systems Research
  • International Journal of Auditing
  • Journal of Comparative Economics
  • Journal of Cybersecurity
  • Journal of Economic Studies
  • Journal of Economic Theory
  • Journal of Governmental & Nonprofit Accounting
  • Journal of Management Accounting Research
  • Journal of Political Economy
  • Journal of Production and Operations Management
  • Management Accounting Research
  • Management Science
  • National Science Foundation
  • Operations Research
  • Public Choice
  • Quarterly Journal of Economics
  • Rand Journal of Economics
  • Research in Law and Economics
  • Review of Accounting Studies
  • Southern Journal of Economics
  • The Accounting Review

Other Editorial Activity

  • Program Committee Member 2002-2021 Workshop on Economics and Information Security (WEIS)
  • Technical Program Committee member for 2nd - 6th Annual Symposium on Information Assurance


‘Collective Action’ a Focus of the 19th Forum on Financial Information Systems and Cybersecurity: A Public Policy Perspective
University of Maryland researchers and the U.S. Attorney for Maryland described the significance of cybersecurity as a collective action,…
Read News Story : ‘Collective Action’ a Focus of the 19th Forum on Financial Information Systems and Cybersecurity: A Public Policy Perspective
Business Leaders’ ‘Enormous Role’ in Cybersecurity Compliance

Smith, School of Public Policy Deliver UMD’s 18th Forum on Financial Information Systems and Cybersecurity

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Maryland Smith Researchers Awarded NSA Funding for ‘Cost-Benefit Analysis of Information Sharing’

The National Security Agency's Laboratory for Telecommunication Sciences (LTS) has awarded research funding for a project titled "Cost-…

Read News Story : Maryland Smith Researchers Awarded NSA Funding for ‘Cost-Benefit Analysis of Information Sharing’


SEC Cites Smith Research in New Cybersecurity Disclosure Rules for Public Companies

Read the article : SEC Cites Smith Research in New Cybersecurity Disclosure Rules for Public Companies
How To Stay Ahead of Cyber Risk

Effective Cybersecurity Requires an Interdisciplinary Approach

Read the article : How To Stay Ahead of Cyber Risk
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