Cyber Risk and Reputational Capital: Evidence from Private Lending Markets

Posted: 6 Mar 2020

See all articles by ChangHwan Choi

ChangHwan Choi

UIBE Business School, University of International Business and Economics

Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School

Jungmin Kim

School of Accounting and Finance, Hong Kong Polytechnic University

Date Written: February 27, 2020

Abstract

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

Choi, ChangHwan and Kang, Jun-Koo and Kim, Jungmin, Cyber Risk and Reputational Capital: Evidence from Private Lending Markets (February 27, 2020). Available at SSRN: https://ssrn.com/abstract=3545027

ChangHwan Choi

UIBE Business School, University of International Business and Economics ( email )

10 Huixindongjie, Chaoyang District
Beijing, 100029
China

Jun-Koo Kang (Contact Author)

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Jungmin Kim

School of Accounting and Finance, Hong Kong Polytechnic University ( email )

M757 Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong
852 2766 7061 (Phone)

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