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This paper studies the puzzling negative book equity phenomenon among US public firms. Our evidence suggests that negative book equity firms exhibit heterogeneous characteristics. We show that a great portion of these firms, while operating at excessive capital structure with leverage ratio over 100%, are financially and operationally healthy. These healthy negative book equity firms increase their debt primarily motived by a need for funds to fulfill investment demand. We also find that the off‐balance sheet intangible assets and quality of intangible assets play an important role in determining the true debt capacity of these firms.

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PurposeIn 2005, China carried out a major reform that allows the previously untradeable shares controlled by large shareholders to become tradable in the secondary market. This reform and subsequent dramatic change of behavior of controlling shareholders, offer researchers a unique opportunity to study the behavior of controlling shareholders and its implication for corporate governance. Asset injection, by which controlling shareholders sell their high quality assets to the listed companies they controlled, became instantly popular after the reform. The purpose of this paper is to provide strong evidence that such asset injection improves both the Tobin's Q and the composite financial performance score of the injected firm.Design/methodology/approachDue to the availability of sample data, this paper focuses on two major types of assets injection: the listed companies purchase the large shareholders' physical assets or equity assets (their shares of other companies) in cash; and the listed companies purchase the large shareholders' physical assets or equity assets through private stock offering, often increasing the share proportion of large shareholders.FindingsThe research findings suggest that this full listing reform aligned the interest of controlling shareholders with the company and that controlling shareholders change their behavior from tunneling to propping.Originality/valueThe contributions of this paper are threefold: First, the paper provides strong evidence of large shareholders' propping behavior. Second, the authors use long‐term corporate financial performance measures to study the impact of asset injection. Third, the authors investigate what types of injections will have a bigger impact on financial performance of the injected firms.