Every Cloud Has a Silver Lining: Analysis of Negative Book Value Firms

Negative book value firms have become more prevalent in recent years, ranging from 0.41% of all Compustat firms in 1961 to 12.47% in 2016 with highest representations in the healthcare, telecommunication, and computer electronic industries. To examine why these negative book value firms are not liquidated, we investigate firms’ 1) current accounting practices, 2) future investment opportunities, and 3) narrative investment disclosures. We first document that negative book value firms adopting a more conservative accounting practice in the current period are less likely to be liquidated. Next, we find that the liquidation likelihood is lower for negative book value firms with higher levels of future intangible investments. Furthermore, we employ a machine-learning-based latent Dirichlet allocation (LDA) approach to measure investment-oriented firm disclosures and find a lower liquidation likelihood for negative book value firms disclosing more future investment narratives. Our evidence is robust to including reorganization firms and extending the length of the liquidation window. Overall, our study sheds light on why negative book value firms are not liquidated by providing evidence on firms’ current accounting practices and future investment opportunities