Are Firms with Negative Book Equity in Financial Distress?
Tze Chuan 'Chewie' Ang
Deakin University - Department of Finance; Financial Research Network (FIRN)
March 18, 2014
Finance and Corporate Governance Conference 2010 Paper
This study examines whether negative book equity (BE) firms are in financial distress by analyzing their operating performance, financial characteristics, distress risk, and survivability when they first report negative BE. Firms with small magnitude of negative BE (SNBE firms) suffer from persistent negative earnings and financial distress, while firms with large magnitude of negative BE (LNBE firms) experience a temporary non-distress related earnings shock. LNBE firms report consecutive years of negative BE, but have lower distress risk and failure rate than both SNBE and control firms. However, all negative BE stocks have abysmal returns subsequent to their first report of negative BE.
Number of Pages in PDF File: 55
Keywords: Negative book equity, operating performance, financial distress, bankruptcy, stock return
JEL Classification: G14, G33, M41
Date posted: January 20, 2010 ; Last revised: March 21, 2014
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