Cyber Risk and Reputational Capital: Evidence from Private Lending Markets
Posted: 6 Mar 2020
Date Written: February 27, 2020
We examine how lenders respond to borrowers’ exposure to cyber risk. We find that firms pay higher loan spreads and receive less bank debt following data breaches, but their covenant intensity remains unchanged. These adverse impacts are more evident when firms suffer larger reputation losses from breaches and when they invest less in reputational capital (i.e., poorer risk management and weaker durable bank relationship) prior to breaches, but are less evident when they invest more in post-breach reputation rebuilding actions (i.e., higher corporate social responsibility performance). Thus, banks incorporate borrowers’ cyber risk and reputational capital in new loan contracting.
Keywords: Cyber risk, Data breach, Cost of bank loan, Bank debt, Covenant, Reputational capital
JEL Classification: G21, G32, G34
Suggested Citation: Suggested Citation