Cybersecurity Risk and the Cost of Debt

Abstract

A firm’s failure to protect and control confidential information is posited to affect its cost of debt. Using a sample of 199 cybersecurity breaches from 2005 to 2014, 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. This relation is more pronounced for firms with more transparent information environments, suggesting that cybersecurity breaches provide an informed signal to creditors about the firm’s level of cybersecurity risk. Overall, I provide evidence that cybersecurity risk has an economically significant impact on firms’ financing costs. Additionally, these findings inform the ongoing regulatory discussion regarding mandated disclosure of cybersecurity events.

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

JEL Classification: M41, O31