Refinancing Risk and Disclosure of Corporate Investment

47 Pages Posted: 13 Dec 2018

See all articles by Tanya Paul

Tanya Paul

University of Pennsylvania - The Wharton School

Frank Zhou

University of Pennsylvania - The Wharton School

Date Written: November 27, 2018

Abstract

This study investigates the relation between the refinancing risk, an important form of risk stemming from debt financing, and firms' decisions to issue capital expenditure forecasts. We find that an increase in refinancing risk is associated with both a lower probability of disclosing and a lower frequency of capital expenditure forecasts. Cross-sectional tests show that firms more exposed to refinancing risk and less able to mitigate this risk are more likely to reduce capital expenditure forecasts, following an increase in refinancing risk. Our results suggest that capital structure can influence firm information environment through managers' disclosure incentives to withhold bad news. This is contrary to common belief that leverage has limited effects on firm disclosure behavior, as debtholders' payoff is less sensitive information and lenders can privately communicate with borrowers.

Keywords: Refinancing Risk, Capital Expenditure Forecasts, Investment, Agency Cost of Debt

JEL Classification: G32, M41

Suggested Citation

Paul, Tanya and Zhou, Frank, Refinancing Risk and Disclosure of Corporate Investment (November 27, 2018). Available at SSRN: https://ssrn.com/abstract=3292659 or http://dx.doi.org/10.2139/ssrn.3292659

Tanya Paul

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Frank Zhou (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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