Negative-Book-Value Firms and Their Valuation

We document a phenomenon that, along with the increasing trend of negative earnings, the frequency and the magnitude of negative book value of equity have also grown substantially over time. Although negative-book-value firms are commonly perceived as financially distressed, we find that the majority of these firms survive for a long time, and that many continue to report negative book value for several years. Over the most recent decade of our 30-year test period, 1976-2005, we find that based on per-dollar of assets, the market, on average, prices negative-book-value firms higher than positive-book-value firms. In addition, we discover that the correlation between market value and book value for negative-book-value firms is negative. Searching for explanations of these phenomena, we examine R&D expenditures of negative-book-value firms. Our results indicate that R&D, especially R&D accumulated over time, not only contributes to the increasing trend of negative-book-value incidences, but also plays an important role in the market's valuation of firms that concurrently report negative earnings and negative book value. [PUBLICATION ABSTRACT]