Are Firms with Negative Book Equity in Financial Distress?
Tze Chuan Ang
The University of Melbourne
March 5, 2010
Finance and Corporate Governance Conference 2010 Paper
This study examines the operating performance and financial characteristics of firms with negative book equity (BE) for signs of financial distress in the period surrounding the year when they first report negative BE. This paper further relates these characteristics with the firms’ subsequent survivability and stock returns. Negative BE firms are heterogeneous. Firms with small magnitude of negative BE (SNBE firms) suffer from persistent negative earnings and they face financial distress. Firms with large magnitude of negative BE (LNBE firms) experience a one-off shock to their earnings and BE, but the impact of the shock is temporary. Unlike SNBE firms, most LNBE firms report consecutive years of negative BE, but they survive for many years and do not face corporate failure. Moreover, LNBE firms have lower distress risk than SNBE firms and lower failure rate compared to positive BE control firms with similar distress risk. Although LNBE firms perform better than SNBE firms subsequent to their first report of negative BE, both of them perform worse compared to positive BE firms with similar size and book-to-market ratio.
Number of Pages in PDF File: 57
Keywords: Negative book equity, operating performance, financial distress, bankruptcy, stock return
JEL Classification: G14, G33, M41working papers series
Date posted: January 20, 2010 ; Last revised: March 10, 2010
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