The Real Effects of Operational Risk: Evidence from Data Breaches
63 Pages Posted: 30 Jun 2019 Last revised: 11 Jan 2020
Date Written: October 31, 2019
Operational risk poses unique challenges to corporations around the world. However, little is known about the consequences of risk management vulnerabilities on financing costs and firm outcomes. In this paper, I document substantial and persistent effects on financing costs and debt contracting caused by risk management vulnerabilities following data breaches of public firms. Exploiting data breach events between 2005 and 2015, I find that lenders charge breached firms 15 to 20 percent larger spreads, and tighten covenant intensity, consistent with a shift in control rights over cash flows. The effect is larger for breaches of financial information or malicious cyber-attacks, and for firms with lower attention to risk management. Moreover, financial and operating leverage increases, profitability drops, and firms face a higher probability of default. Ex-ante mispricing by banks does not explain these findings.
Keywords: Bank Loans, Covenants, Data Breach, Hacking, Risk Management, Spread
JEL Classification: G21, G23, G32
Suggested Citation: Suggested Citation