Document Type
Article
Publication Date
2012
Publication Title
Accounting and Finance Research
Volume
1
Issue
1
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.
DOI
10.5430/afr.v1n1p53
Recommended Citation
Rakowski, David and Elsaid, Eahab. (2012). Financing a loss. Accounting and Finance Research. Accounting and Finance Research, 1 (1).
https://scholar.uwindsor.ca/odettepub/12
Comments
This article was originally published in Accounting and Finance Research, Copyright (2012) Sciedu Press.