Do Capital Expenditures Influence Earnings Performance : Evidence from Loss-Making Firms

We 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