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Financing a Loss

DOI: 10.5430/afr.v1n1p53

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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.

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