Cybersecurity Risk and the Cost of Debt

58 Pages Posted: 24 Jun 2019 Last revised: 24 Mar 2022

See all articles by Amy Sheneman

Amy Sheneman

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: December 17, 2017

Abstract

This study investigates the relation between cybersecurity breaches and the cost of debt. Using a sample of 290 cybersecurity breaches from 2005 to 2018, I find a positive association between a cybersecurity breach and a firm’s cost of privately placed debt. Compared with loans initiated before a breach, loans initiated after a breach have significantly higher spreads (30 basis points on average). This relation is more pronounced for firms with lower pre-breach credit ratings (i.e., higher credit risk) and with less investment in control systems (i.e., higher IT risk). I also provide evidence that loans issued after a breach have fewer lenders, are smaller in size, and have a higher likelihood of requiring performance pricing. Finally, I document adverse effects of cybersecurity breaches in both the public debt and equity markets. Overall, these findings inform the ongoing regulatory discussion regarding mandated disclosure of cybersecurity events and suggest cybersecurity risk has an economically significant impact on firms’ financing costs.

Keywords: cost of debt, cybersecurity, business risk, technology, cost of equity

JEL Classification: M41, O31

Suggested Citation

Sheneman, Amy, Cybersecurity Risk and the Cost of Debt (December 17, 2017). Available at SSRN: https://ssrn.com/abstract=3406217 or http://dx.doi.org/10.2139/ssrn.3406217

Amy Sheneman (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

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