Inventory handles negative inventory balances as follows:

Positive or Zero On-Hand Quantity

For each receipt transaction, if the new on-hand quantity is positive, Inventory uses
the transaction cost (such as the purchase order price) to calculate the average cost.
Negative On-Hand Quantity
If the new on-hand quantity is negative or zero after the time of the receipt,
Inventory splits the transaction into two parts, if necessary:
Quantity
from
negative to
zero

Inventory uses the current average cost of the item--rather than the transaction
cost--for that portion of the receipt quantity that increases the on-hand balance
from negative to zero. For example, if the on-hand balance is -25, and the
receipt quantity is 40, Inventory receives 25 each at the current average cost.
In effect, this does not change the average unit cost of the item.
Quantity
Inventory uses the transaction cost for that portion of the receipt quantity that
from zero to increases the on-hand balance from zero to positive. From the example above,
positive
Inventory receives 15 each at the transaction cost. In effect, this establishes
the unit cost of the Transaction as the new average cost of the item. Inventory
writes off any difference between the total receipt cost and the cost charged to
your inventory to the average cost variance account.

This feature insures that the accounting transactions you report to the general
ledger and your inventory value reports balance at all times.

Under Inventory responsibility, navigate Setup -> Organizations -> Parameters .Inventory
Parameters tab, look for "Allow Negative Balances" field.
You are allowed to ship confirm even you have no stock on hand! Excerpt from Metalink,
In order to pick release and drive inventory negative, the ct must make their items nonreservable. For reservable items, the order gets backordered when not enough quantity is on
hand. For non-reservable items, the orders get updated to status of Staged, and the user enters
the source subinventory, revision, lot, and locator in the Shipping Transactions form. Ship
confirm allows users to drive inventory negative when the Allow Negative Stock checkbox is
checked.