Refinancing Risk and Disclosure of Corporate Investment

Abstract

This paper investigates the relation between the refinancing risk of corporate debt and firms' decisions to issue capital expenditure forecast. Building on theories of financing frictions that predict a negative relation between refinancing risk and firm investment and theories of strategic voluntary disclosure where managers can withhold the unfavorable news of reduced investment, we find that an increase in refinancing risk is associated with both lower probability of disclosing capital expenditure forecasts and lower frequency of capital expenditure forecasts. Cross-sectional tests show that firms that are more exposed to refinancing risk and are less able to mitigate refinancing 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.