The Information Content of Negative Book Value

Abstract

In modern economy where off-balance-sheet intangible assets are abundant, the relevance of negative book value warrants attention. This study examines the stock market’s response to first-time negative book value reporting by firms that have maintained positive book value for many years. By analyzing these firms’ size-adjusted cumulative abnormal returns around preliminary earnings announcement dates and 10-K filing dates, we find that stock prices respond negatively to first-time negative book value reporting and that such response is incremental to the market’s response to earnings announcements. Furthermore, the market’s incremental response is weaker for firms in industries with higher off-balance-sheet intangible assets.