Going Negative: What to do with Negative Book Equity Stocks

Posted: 21 May 2019

See all articles by Stephen J. Brown

Stephen J. Brown

New York University - Stern School of Business

Paul Lajbcygier

Monash University - Department of Banking & Finance

Bob Li

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: June 9, 2008

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.

Keywords: Negative book value, value factor, generalized style classification

JEL Classification: G12, M41

Suggested Citation

Brown, Stephen J. and Lajbcygier, Paul and Li, Bob, Going Negative: What to do with Negative Book Equity Stocks (June 9, 2008). https://doi.org/10.3905/JPM.2008.35.1.95, Available at SSRN: https://ssrn.com/abstract=1142649 or http://dx.doi.org/10.2139/ssrn.1142649

Stephen J. Brown (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0306 (Phone)
212-995-4233 (Fax)

Paul Lajbcygier

Monash University - Department of Banking & Finance ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Bob Li

affiliation not provided to SSRN ( email )

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
6,650
PlumX Metrics