Can the value of shareholder equity be negative? 

Not really. But, it depends. 

It depends on how we define shareholder equity. 

First, equity refers to residual ownership in a company. Similar to your net worth. 

It’s the assets net the liabilities. It’s what you own less what you owe. 

The value that is left over is by definition that value of your equity. 

But, there are different ways to calculate the value to equity investors. 

You can look at the equity value as measured on the company’s balance sheet aka book value.

Or, you can look at the value of equity as measured by the market aka market value of equity. 

There is a large disparity between the two values because a company can be worth a lot more than its assets depending on its earnings power. 

Take book value of equity. 

Mathematically, liabilities would need to exceed assets. 

If that were to happen, then we would see that shareholders equity is negative. 

So, can that happen? Yes. 

Companies can owe more money than they currently have. If you take out debt 

But then, most people argue that neither share price nor share count can be negative. Therefore, equity value cannot be negative. 

So, why can the book value of equity ever be negative? It shouldn’t.

The answer lies in the law. 

Limited liability. 

As an equity shareholder, you are not liable for any liabilities of the company beyond your initial investment. 

This sets a cap on the potential downside – the total invested amount. 

Therefore, we will never see the stock and correspondingly equity value go negative. 

Book value of equity violates the rule of limited liability. 

Take Starbucks.