Cybersecurity Risk and the Cost of Debt

This study aims to empirically demonstrate that cybersecurity risks disclosed in earnings conference calls elevate corporate debt costs. We use a word-embedding approach to quantify f irms’ cybersecurity risk based on earnings conference calls from U.S. public firms between 2002 and 2022. Our empirical evidence reveals that the cost of debt is positively associated with their cybersecurity risk. Firms with higher risk scores are perceived to have a higher propensity for future cybersecurity incidents, which increases their default risk and, consequently, increases their cost of debt. We also find that firms with higher levels of digitization and more sophisticated network information technology systems are more prone to cybersecurity risks, which reinforces the strength of the link between cybersecurity risks and the cost of debt. The findings of this study provide important practical guidance for companies in addressing cybersecurity risks and reducing their debt financing costs.