Are Firms with Negative Book Equity in Financial Distress?
Tze Chuan Ang, The University of Melbourne ABSTRACT: This study examines (i) 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 and (ii) 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 financial distress, while firms with large magnitude of negative BE (LNBE firms) experience a temporary shock to their earnings and BE. Unlike SNBE firms, most LNBE firms report consecutive years of negative BE, but they survive for many years. Moreover, LNBE firms have lower distress risk and failure rate than both SNBE firms and positive BE control firms. Although LNBE stocks outperform SNBE stocks subsequent to their first report of negative BE, both of them underperform control firms with positive BE. Full-Text is
