The Role of Capital Expenditure Forecasts in Debt Contracting

Abstract

This study examines whether firms’ capital expenditure forecasts can act as a commitment to not engage in expropriation of lenders through opportunistic investment activities. We find that firms with higher leverage and lower credit quality are more likely to issue capital expenditure forecasts. Furthermore, for firms that issue capital expenditure forecasts, investment efficiency is greater and loan spreads are lower, and these associations are stronger when the forecasts are more credible. We do not find similar results for earnings forecasts. These results suggest that capital expenditure forecasts can be a commitment mechanism to reduce contracting costs with creditors.