A Study on Firms with Negative Book Value of Equity

Luo, Haowen; Liu, Ian; Tripathy, Niranjan

doi:10.1111/irfi.12260

Cited by 8 publications

(4 citation statements)

References 54 publications

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“…The same applies to observations with missing be. This is in line with Luo, Liu, and Tripathy (2021), who argue that negative book equity firms are indeed financially healthy but increase their debt to meet current investment demand.…”

Section: Recovering Missing Firm Characteristicssupporting

confidence: 88%

Empirical Asset Pricing with Missing Data

Beckmeyer¹,

Wiedemann²

2022

SSRN Journal

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Section: Recovering Missing Firm Characteristicssupporting

confidence: 88%

Empirical Asset Pricing with Missing Data

Beckmeyer¹,

Wiedemann²

2022

SSRN Journal

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“…Jan and Ou (2012) find that NBE firms are priced higher than positive BE firms, while Ang (2015) argues that NBE stocks experience substantial loss subsequent to their announcement of negative book value. Luo, Liu, and Tripathy (2019) conclude that not all NBE firms are financially distressed, and some of them use excessive leverage to finance off-balanced intangible assets. Dichev (1998) and Campbell et al (2008) remark that distress risk is not rewarded by higher returns.…”

Section: Literature Reviewmentioning

confidence: 98%

Return Premium of Financial Distress and Negative Book Value: Emerging Market Case

Kakinuma¹

2020

JAFEB

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The purpose of this paper is to examine a financial distress premium in the emerging market. A risk-return trade-off of negative book equity (NBE) and distress firms is empirically analyzed using data from the Stock Exchange of Thailand. This research employs Ohlson's (1980) bankruptcy model as a measurement of distress risk. The results indicate that distress firms outperform solvent firms in the Thai market and deny distress anomaly often found in the developed market. Fama-Frech (1993) three-factor model and Carhart (1997) four-factor model verify the existence of a distress premium in the Thai capital market. Risk-seeking investors demand greater compensation for bearing risks of distress firms' going concern. This paper provides fresh evidence that default risk is a significant explanatory factor in pricing stocks in the emerging market. Also, this study sheds light on the role of NBE firms in asset pricing. Most studies eliminate NBE firms from their sample. However, NBE firms yield superior average cross-sectional returns, albeit with higher volatility. Investors are rewarded with distress risks associated with NBE firms. The outperformance of NBE firms is statistically significant when compared to the overall market. The NBE premium disappears when factoring size, value, and momentum in time-series analysis.

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“…more than half of the time. The baseline analysis does not exclude firms which incidentally reported negative equity, because such cases are highly prevalent and often not indicative of financial distress (Jan and Ou, 2012;Luo et al, 2021). Table A.2 provides an overview of the data cleaning steps and the impact on the sample.…”

Section: A1 Data Descriptionmentioning

confidence: 99%