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Are Firms with Negative Book Equity in Financial Distress?

55 Pages Posted: 20 Jan 2010 Last revised: 21 Mar 2014

Tze Chuan 'Chewie' Ang

Deakin University - Department of Finance; Financial Research Network (FIRN)

Date Written: March 18, 2014

Abstract

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.

Keywords: Negative book equity, operating performance, financial distress, bankruptcy, stock return

JEL Classification: G14, G33, M41

Suggested Citation

Ang, Tze Chuan 'Chewie', Are Firms with Negative Book Equity in Financial Distress? (March 18, 2014). Finance and Corporate Governance Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1533964 or http://dx.doi.org/10.2139/ssrn.1533964

Tze Chuan Ang (Contact Author)

Deakin University - Department of Finance ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia
+61 3 9244 6626 (Phone)

HOME PAGE: http://www.deakin.edu.au/profiles/tze-ang

Financial Research Network (FIRN)

HOME PAGE: http://www.firn.org.au

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