Do capital expenditures influence earnings performance: Evidence from loss‐making firms

Abstract

AbstractWe examine the association between capital expenditures and near‐term earnings performance for loss‐making firms. Using a sample of 24,030 firm‐year observations from 2006 to 2015, we find that loss‐making firms show different patterns of capital expenditures than profit‐making firms. Moreover, we find that capital expenditures of loss‐making firms have a greater influence on the absolute value of near‐term earnings performance. We also examine the effect of capital expenditures on stock compensation and find a positive association between them for profit‐making firms but not for loss‐making firms. Further, our results indicate that the negative association between capital expenditures and near‐term earnings performance for loss‐making firms is not conditional on the monitoring by institutional investors and creditors. Our findings contribute to the debate on capital expenditure accounting in loss‐making firms.