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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26348
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| Title: | Going Negative: What to Do with Negative Book Equity Stocks |
| Authors: | Brown, Stephen
Lajbcygier, Paul
Li, Bob |
| Issue Date: | 19-Dec-2007 |
| Series/Report no.: | FIN-07-035 |
| Abstract: | A firm’s book equity is a measure of the value held by a
firm’s ordinary shareholders. Increasingly, it is being reported
as a negative number. Since the firm’s limited liability structure
means that shareholders’ value cannot be negative value, negative
book equity has no obvious interpretation. Consequently, both
practitioners and academics typically omit such stocks. While these
stocks are small in number they are disproportionately represented in
extreme value/growth sectors, and therefore can have an impact on
applications where “value” is defined in terms of book
equity. We propose a new approach that classifies negative book equity
stocks across the value/growth spectrum by considering how close their
returns correspond to stocks that fit more obviously into these
classifications. We find that this new value factor, which includes
negative book equity stock, is economically and statistically different
from the old value factor that excludes such stocks. Although we
illustrate how this approach can be used to classify negative book
equity stock, the approach is quite general and may be used whenever
particular accounting data are unavailable or otherwise suspect. |
| URI: | http://hdl.handle.net/2451/26348 |
| Appears in Collections: | Finance Working Papers
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