IDEAS home Printed from https://ideas.repec.org/a/ibn/ijefaa/v16y2024i4p71.html
   My bibliography  Save this article

Negative Equity Firms Prior to 2008 Great Recession

Author

Listed:
  • Daniel T. Lawson

Abstract

This paper examines the fate of firms that report negative book-value equity leading up to the 2008 Great Recession. This is the first study to document the quantity and longevity of negative equity firms and to analyze the sources of funds used to sustain these failing and recovering firms. For the full sample of Compustat from 1970 to 2007, negative-equity firms account for 9.66% of the 246,869 firm-year observations. The number of firms reporting negative equity steadily increases over the sample period, with less than 1% of the firms reporting negative equity in 1970 to more than 10% in 2007. Upon initially reporting negative equity, these firms remain active on average for an additional 6.18 years. Distressed firms appear to have a remarkable ability to generate substantial funds through short-term and long-term debt and through the issuance of stock, thereby postponing or avoiding costly bankruptcy. While negative equity firms may not have caused the 2008 Great Recession, the findings of this study reveal a disturbing trend that warrants further research.

Suggested Citation

  • Daniel T. Lawson, 2024. "Negative Equity Firms Prior to 2008 Great Recession," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 16(4), pages 1-71, April.
    • Handle: RePEc:ibn:ijefaa:v:16:y:2024:i:4:p:71
    as

    Download full text from publisher

    File URL: https://ccsenet.org/journal/index.php/ijef/article/download/0/0/49928/54000
    Download Restriction: no
    File URL: https://ccsenet.org/journal/index.php/ijef/article/view/0/49928
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kahn, James A, 1985. "Another Look at Free Banking in the United States [New Evidence on the Free Banking Era]," American Economic Review, American Economic Association, vol. 75(4), pages 881-885, September.
    2. Michael J. Barclay & Erwan Morellec, 2006. "On the Debt Capacity of Growth Options," The Journal of Business, University of Chicago Press, vol. 79(1), pages 37-60, January.
    3. Gavin Cassar & Scott Holmes, 2003. "Capital structure and financing of SMEs: Australian evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 43(2), pages 123-147, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ana Venâncio & João Jorge, 2022. "The role of accelerator programmes on the capital structure of start-ups," Small Business Economics, Springer, vol. 59(3), pages 1143-1167, October.
    2. Elmina Homapour & Larry Su & Fabio Caraffini & Francisco Chiclana, 2022. "Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms," Mathematics, MDPI, vol. 10(7), pages 1-28, March.
    3. Rana El Bahsh & Ali Alattar & Aziz N. Yusuf, 2018. "Firm, Industry and Country Level Determinants of Capital Structure: Evidence from Jordan," International Journal of Economics and Financial Issues, Econjournals, vol. 8(2), pages 175-190.
    4. Tao Shen, 2017. "Credit spreads and investment opportunities," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 117-152, January.
    5. Maté, María Luz. & Hernández, Ginés. & Sánchez, Javier. & Mínguez, Antonio., 2013. "¿Hay efectos de interacción regional en el comportamiento financiero de las PyME?," El Trimestre Económico, Fondo de Cultura Económica, vol. 0(320), pages 841-867, octubre-d.
    6. Simon Grima & Gani Asllani & Jonathan Spiteri & Nikson Daka, 2019. "The Cost and Information Management Effect in SMEs: An Empirical Analysis," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 360-369.
    7. Hugh Rockoff, 1991. "Lessons from the American Experience with Free Banking," Palgrave Macmillan Books, in: Forrest Capie & Geoffrey E. Wood (ed.), Unregulated Banking, chapter 3, pages 73-129, Palgrave Macmillan.
    8. David K. Chalmers & Marco Della Porta & Luca Sensini, 2020. "Export Intensity and Leverage: An Empirical Analysis of Spanish SMEs," International Journal of Economics and Financial Issues, Econjournals, vol. 10(5), pages 382-386.
    9. Jun Du & Alessandra Guariglia & Alexander Newman, 2010. "Does social capital affect the financing decisions of Chinese small and medium-sized enterprises?," Discussion Papers 10/13, University of Nottingham, GEP.
    10. Nur Ainna Ramli & Gilbert Nartea, 2016. "Mediation Effects of Firm Leverage in Malaysia: Partial Least Squares - Structural Equation Modeling," International Journal of Economics and Financial Issues, Econjournals, vol. 6(1), pages 301-307.
    11. Dufour, Dominique & Luu, Philippe & Teller, Pierre, 2018. "The influence of cash flow on the speed of adjustment to the optimal capital structure," Research in International Business and Finance, Elsevier, vol. 45(C), pages 62-71.
    12. Morellec, Erwan & Zhdanov, Alexei, 2008. "Financing and takeovers," Journal of Financial Economics, Elsevier, vol. 87(3), pages 556-581, March.
    13. David Yechiam Aharon & Yossi Yagil, 2019. "The Impact of Financial Leverage on the Variance of Stock Returns," IJFS, MDPI, vol. 7(1), pages 1-18, March.
    14. Krivogorsky, Victoria & Joh, Gun-Ho & DeBoskey, D.G., 2018. "The influence of supply side factors on firm's borrowing decisions: European evidence," Global Finance Journal, Elsevier, vol. 35(C), pages 202-222.
    15. Miguel Acedo-Ramírez & Juan Ayala-Calvo & José Rodríguez-Osés, 2013. "Capital structure of small companies in the Spanish footwear sector: relevant factors," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 4(2), pages 155-173, June.
    16. repec:zbw:bofitp:2015_011 is not listed on IDEAS
    17. Xiaoyan Chen & Xin Ling, 2017. "Determinants of Chinese equity financing behaviours: traditional model and the alternatives," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57, pages 69-100, April.
    18. Iftekhar Hasan & Nada Kobeissi & Haizhi Wang & Mingming Zhou, 2015. "Banking Structure, Marketization, and Small Business Development: Regional Evidence From China," Pacific Economic Review, Wiley Blackwell, vol. 20(3), pages 487-510, August.
    19. Dudley, Evan, 2012. "Capital structure and large investment projects," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1168-1192.
    20. Miglo, Anton, 2022. "Theories of financing for entrepreneurial firms: a review," MPRA Paper 115835, University Library of Munich, Germany.
    21. Sen Wang & Jianjun Zou & Ning Zeng, 2016. "New Evidences of Chinese Micro and Small Enterprises Financing: Capital Structures and Human Capitals," Business and Economic Research, Macrothink Institute, vol. 6(1), pages 1-12, June.

    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ibn:ijefaa:v:16:y:2024:i:4:p:71. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Canadian Center of Science and Education (email available below). General contact details of provider: https://edirc.repec.org/data/cepflch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.