Disclosure of Cybersecurity Investments and the Cost of Capital

66 Pages Posted: 2 Apr 2020 Last revised: 29 Jan 2024

See all articles by Taha Havakhor

Taha Havakhor

Temple University- Fox School of Business

Mohammad Saifur Rahman

Purdue University - Krannert School of Management

Tianjian Zhang

California State University Dominguez Hills

Date Written: February 12, 2021

Abstract

Despite growing cybersecurity threats and regulatory encouragement, firms rarely disclose their investments in countermeasures. This silence, amidst investor interest in such information, creates information asymmetry. We investigate whether disclosing cybersecurity investments creates a tangible financial benefit by analyzing its impact on a firm's cost of capital. Using exogenous shocks triggered by SEC comment letters, we find that firms disclosing cybersecurity investments enjoy a significant reduction in their cost of capital. This benefit is amplified for firms with more informative disclosures and higher analyst coverage. The additional factors that matter are larger actual investments in cybersecurity, greater institutional ownership of the firm’s stocks, and disclosures of cybersecurity investments during periods of capital raising. Our findings suggest that disclosing cybersecurity investments empowers capital market stakeholders like analysts and creditors to better assess risk, ultimately leading to lower borrowing costs for firms. This study sheds light on the financial value of transparency in cybersecurity management, encouraging firms to proactively disclose their investments and mitigate information asymmetries in an increasingly risky environment.

Keywords: Disclosure, cybersecurity investment, cost of capital, information asymmetry, informativeness of disclosure, analyst coverage

JEL Classification: D82, G10, M41, O33

Suggested Citation

Havakhor, Taha and Rahman, Mohammad Saifur and Zhang, Tianjian, Disclosure of Cybersecurity Investments and the Cost of Capital (February 12, 2021). Available at SSRN: https://ssrn.com/abstract=3553470 or http://dx.doi.org/10.2139/ssrn.3553470

Taha Havakhor

Temple University- Fox School of Business ( email )

201C Speakman Hall
1810 North 13th Street
Philadelphia, PA 19122-6083
United States
(215)204-6945 (Phone)

Mohammad Saifur Rahman

Purdue University - Krannert School of Management ( email )

403 W. State St
West Lafayette, IN 47907
United States
765-494-4464 (Phone)

Tianjian Zhang (Contact Author)

California State University Dominguez Hills ( email )

1000 E. Victoria Street
Carson, CA 90747
United States

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