Suchergebnisse

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.

AbstractCreditors routinely impose on a borrowing firm a minimum interest coverage ratio that the firm has to maintain. I show that nonlinear costs of financial distress provide a possible explanation of why firms find it optimal to have an interest coverage ratio covenant in their debt indenture, even in the absence of information asymmetries or agency costs.