Title: Artificial Intelligence Capacity and the Cost of Debt

Authors: Yutao Li (University of Lethbridge), Hui (Eva) Liang (The Chinese University of Hong Kong), Wenye Tang (Appalachian State University), Ye Wang (Toronto Metropolitan University)

Abstract: This study examines the impact of a borrower’s Artificial Intelligence (AI) capacity on its cost of debt. Using data from Revelio Labs, we develop a firm-level AI capacity measure and find a negative association between AI capacity and loan spreads. Further analysis reveals that the reduction in cost of debt for high AI capacity is concentrated in borrowers facing high product market competition and borrowers with a greater amount of R&D, capital expenditures, and low leverage. Our study offers novel empirical evidence on how creditors price AI technology, contributing to both accounting and finance research and AI-related business studies.