Negative Equity as an Indicator of Company Failure:Theoretical Considerations and an Empirical Study of Estonian Companies
Corporate failure analysis and prediction has been a popular research area for nearly half a century, but there is still no common practice on how to define and measure a company failure. The theoretical contribution of our paper is argumentation for and against the use of negative equity as a measure for identifying corporate failure. The empirical section of the paper is based on the case study of 24 Estonian companies that have undergone a negative equity position at least once between the years 2003 and 2006. We seek to identify whether the reasons underlying their negative equity position represent signs of business failure. We find that negative equity may signal financial problems like excessive leverage and unavailability of sufficient internal financing as well as decreased liquidity. In this way negative equity may be in many cases an appropriate measure for identifying a threat to a companys viability. Several theoretical and practical considerations demonstrate, however, that a negative equity position may not refer to a business failure, e.g. in the case of start-ups and companies that belong to a larger corporate group. Overall, negative equity appears not to be a de facto statement of failure but rather a strong warning signal of distress.
company failure bankruptcy negative equity
Aaro Hazak Merle Rannaia
Department of Economics Tallinn University of Technology Tallinn, Estonia
国际会议
上海
英文
155-159
2011-03-11（万方平台首次上网日期，不代表论文的发表时间）