Global zombie companies: measurements, determinants, and outcomes

Abstract

Academics and practitioners are increasingly concerned about global zombieism, a term used to describe insolvent firms that survive with the support of financial institutions, investors, or governments, particularly during unusual market conditions. Using dual-filters of interest coverage ratio and an empirically validated default prediction model, we propose a new measure to gauge the extent of zombieism in the world’s 20 largest economies. The average zombie share of listed firms has increased significantly since 1990, to about 7% in 2020. Zombie firms are typically found among small and medium-sized enterprises. Economic growth, industry compositions, and lenient monetary policies have strong explanatory power for global zombieism. We show that the presence of zombie firms generates significant market congestion, limiting the growth of healthy firms. We also find that the development of global corporate bond markets contributes to zombie firm growth. Leveraging staggered bankruptcy reforms as an exogenous variation, we find that these reforms lower zombie ratio by 1.4% points. The reduction is more substantial if the bankruptcy law becomes more creditor-friendly. Having failed to recover, zombie firms can survive for an average of 5 years before declaring bankruptcy, being delisted, or being acquired. Bankruptcy reforms accelerate the dissolution of zombie status.