Document Type

Article

Publication Date

2012

Publication Title

Accounting and Finance Research

Volume

1

Issue

1

DOI

10.5430/afr.v1n1p53

Keywords

Loss, Cash flow, Capital structure, Dividend policy, Working capital management

Abstract

When companies have a net loss accompanied by negative operating cash flows, they must decide how to handle the financing deficit, or, stated differently, they must decide how to finance the loss. By examining a large sample of firms with net losses, we document how companies respond to the financing shock that occurs with negative cash flow. For companies with a one-year loss, current assets decrease and current liabilities increase. While we observe that leverage ratios increase during a loss year, this increase has more to do with decreasing book equity than an increase in long-term debt. However, when the loss persists into a second year, companies make more fundamental changes, often downsizing by decreasing fixed assets and by issuing longer term debt.

Comments

This article was originally published in Accounting and Finance Research, Copyright (2012) Sciedu Press.

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