Negative equity companies in Europe: theory and evidence

Abstract Businesses in technical bankruptcy are part of the European context, many of them in such financial distress that they have lost all their equity and a very high percentage of them have even incurred negative equity. There is a very little literature analysing these companies; moreover, they are considered as out of the ordinary because they do not fit into conventional theories of business, and are removed from most samples. They are largely neglected. The research questions posed here are a step towards remedying this: "What are the scale and the economic impact of negative equity companies in terms of risk transference? ", "Does this problem differ from one European country to another? ", "Is it an effect of the crisis? ". Using the Bureau Van Dijk's Amadeus database, we find that nearly 20% of companies have negative equity. Such companies handle more than one billion Euros, i.e. nearly 10% of European GDP. So the results suggest that negative equity companies have a high weight in Europe and, based on the country cluster studied, it seems that neither culture nor geographical area is determinant in explaining their distribution across countries. Nor is the crisis a determinant in explaining their existence, so the problem is not cyclical but structural. These findings have potentially important implications in encouraging European decision makers to factor such companies into their policies and to include them in economic models. Keywords moral hazard negative equity stakeholders Amadeus zombies crisis JEL Classification G33, M29 Introduction The world's leading economies are striving to become more competitive so that they can all get onto the path of sustainable growth and into a new economic cycle. A competitive economy needs a competitive fabric of business, and it is precisely in this aspect that the main weakness of many countries may lie. There are companies whose future viability is uncertain and whose ability to compete is highly limited. These companies may transfer risks, and thus losses should they go under, to others with which they maintain trading and other links. They have in fact been described as "zombie companies" (Ahearne and Shinada 2005; Caballero et al. 2008). The most extreme type of zombie company comprises negative equity companies which continue to trade in spite of having lost all their equity (see Mohrman and Stuerke 2014 for an example). The risk posed by these extremely leveraged companies lines not so much in the risk of their going bankrupt but rather in the potential economic impact of all their risks being transferred to other companies. Despite the fact that negative equity companies are part of the national context in European countries, scholars of international finance have paid scant attention to them (Luo et al. 2015; Retolaza et al. 2016). The research questions posed here are a step towards remedying this: "What are the scale and the economic impact of negative equity companies in terms of risk transference? " "Does this problem differ from one European country to another? " "Is it an effect of the crisis? ". 1. Research question and structure To answer these questions our study uses the Bureau Van Dijk's Amadeus database to analyze the situation in the European Union in 2012 and the Amadeus Top 250,000 database to test for a country effect and a crisis effect and to analyse the trend over the 4-year period from 2009 to 2012. Earlier studies have also used these data and the quality of the information in Amadeus has been checked for accounting data (e.g. Faccio et al. 2011). We focus on European countries because reporting requirements and practices mean that rich data are available for a large fraction, in terms of euro value, of the universe of equity. The aim of this study is to add to the established literature by looking at extremely leveraged companies, with negative equity understood as the worst capital structure of companies in terms of guarantees of meeting the obligations acquired with their stakeholders. …