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Are Firms with Negative Book Equity in Financial Distress?

Author

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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)

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.

Suggested Citation

  • Tze Chuan Chewie ANG, 2015. "Are Firms with Negative Book Equity in Financial Distress?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 18(03), pages 1-41.
    • Handle: RePEc:wsi:rpbfmp:v:18:y:2015:i:03:n:s0219091515500162
    DOI: 10.1142/S0219091515500162
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    More about this item

    Keywords

    Negative book equity; operating performance; financial distress; bankruptcy; stock return; G14; G33; M41;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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