Abstract In this study, we examine whether and how managers’ intentions to raise equity are associated with future stock price crash risk. Therefore, we apply modern information retrieval techniques to corporate textual disclosures by constructing document embeddings that preserve contextual relationships in managers’ discussions on liquidity and capital resources. Using these document embeddings, we construct a continuous measure of managers’ intentions to raise equity. We document that the search for equity is associated with higher future stock price crash risk. Further analyses suggest that managers with stronger intentions to raise equity are more likely to block negative news flow and that these intentions reinforce the effects of earnings manipulation and textual obfuscation on stock price crash risk. In summary, our results suggest that managers’ search for equity incentivises managerial bad news hoarding. 

/pdf/nothing-but-good-intentions-the-search-for-equity-and-stock-54e8sycu.pdf

Nothing but good intentions: the search for equity and stock price crash risk

Abstract The informational content of prices hypothesis in Modigliani and Miller (and Fisher before them) advocates that organizations’ market prices could somehow estimate their growth prospects and intangible assets. For this estimation, discounted cash flow models are frequently employed. However, these models require information about monetary flows and discount rates in the long future, which are most difficult to confirm in the moment of the analysis. Thus, Tobin’s q or similar procedures as the market-to-book value of the firm have been claimed (and presupposed) as evidence that markets could identify growth prospects and intangible assets. Indeed, Tobin’s q tends to be higher for new and/or intangible intensive firms. Nevertheless, we know that for q > 1, less debt tends to imply a higher q, whereas the inverse holds for the less frequent q < 1. To explain this phenomenon, we propose a “mechanical effect hypothesis” describing an automatic relationship between q and capital structures at the variable computation. Accordingly, as intangible-intensive and/or new firms are likely to have q > 1 and less debt, a mechanical effect increases their q-values without requiring growth perspectives, or intangibles. Hence, this new hypothesis disputes Fisher-Modigliani-Miller’s utilization of discounted cash flow models to explain markets and prices.

https://doi.org/10.1080/23322039.2022.2132636

Hypothesis that Tobin’s q captures organizations’ debt levels instead of their growth opportunities and intangible assets

The purpose of this paper is to examine a financial distress premium in the emerging market. A risk-return trade-off of negative book equity (NBE) and distress firms is empirically analyzed using data from the Stock Exchange of Thailand. This research employs Ohlson’s (1980) bankruptcy model as a measurement of distress risk. The results indicate that distress firms outperform solvent firms in the Thai market and deny distress anomaly often found in the developed market. Fama-Frech (1993) three-factor model and Carhart (1997) four-factor model verify the existence of a distress premium in the Thai capital market. Risk-seeking investors demand greater compensation for bearing risks of distress firms’ going concern. This paper provides fresh evidence that default risk is a significant explanatory factor in pricing stocks in the emerging market. Also, this study sheds light on the role of NBE firms in asset pricing. Most studies eliminate NBE firms from their sample. However, NBE firms yield superior average cross-sectional returns, albeit with higher volatility. Investors are rewarded with distress risks associated with NBE firms. The outperformance of NBE firms is statistically significant when compared to the overall market. The NBE premium disappears when factoring size, value, and momentum in time-series analysis.

https://www.koreascience.or.kr:443/article/JAKO202026061031530.pdf

Return Premium of Financial Distress and Negative Book Value: Emerging Market Case

This study documents that book equity of U.S. firms has decreased dramatically over time and such decrease is systematic across various industries and firm size. Our analysis shows that intangible capital investment explains a significant portion of the decrease in book equity even after controlling for concurrent effect of leverage and profitability on book equity, and the effect of intangible capital investment on book equity increased in recent years. Further analysis shows that intangible capital contributes to decrease in book equity mostly through the channel of changing firm characteristics rather than changing sensitivity over time. Our findings suggest that investors must incorporate the effect of intangible capital investment into their valuation analysis, as indexes or investment strategies relying on indicators constructed by book equity may be biased and misleading.

/pdf/the-cost-of-innovation-and-decreasing-book-equity-of-u-s-2e2ph6hck3.pdf

The Cost of Innovation and Decreasing Book Equity of U.S. Firms

The Role of Accounting Conservatism in the Decreasing Book Equity of U.S. Firms

This paper studies the puzzling negative book equity phenomenon among US public firms. Our evidence suggests that negative book equity firms exhibit heterogeneous characteristics. We show that a great portion of these firms, while operating at excessive capital structure with leverage ratio over 100%, are financially and operationally healthy. These healthy negative book equity firms increase their debt primarily motived by a need for funds to fulfill investment demand. We also find that the off‐balance sheet intangible assets and quality of intangible assets play an important role in determining the true debt capacity of these firms.

A Study on Firms with Negative Book Value of Equity

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A Study on Firms with Negative Book Value of Equity