IMPLICATIONS OF NEGATIVE RETAINED EARNINGS

Mary Teal
V. Sivarama Krishnan
University of Central Oklahoma
ABSTRACT
This study describes the accounting rules that cause retained earnings to be inaccurate measures of historic profitability. It analyzes this curious phenomenon and the accounting origins for the occurrence of negative retained earnings that are reported by relatively healthy firms. In most cases, this event has to do with stock repurchases at prices that are well above their book values. This instance and other incidents of the appearance of negative balances in this account can reflect a company’s own decisive rationale. Therefore, the study identifies a few firms that report negative or low retained earnings in spite of a profitable history. The authors attempt an explanation for the accounting preference.