Are Firms with Negative Book Equity in Financial Distress?

Tze Chuan Chewie Ang ()
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Tze Chuan Chewie Ang: Department of Finance, Faculty of Business and Law, Deakin University, 221 Burwood Highway, Burwood, Victoria 3125, Australia

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2015, vol. 18, issue 03, 1-41

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; G14; G33; M41 (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1142/S0219091515500162

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