Zombie firms in network: Congestion and evergreening

Abstract

We explore the spillover impact of zombie firms in Turkey by exploiting a rich administrative dataset that contains firm-level information on balance sheets, inter-firm sales, employment, and firm-bank level credit records. We document three key facts regarding zombie dynamics: (i) Leveraging matched firm-bank level credit registry data, we highlight the presence of an evergreening motive, leading to a misallocation of credit away from productive firms. At the same time, healthy firms in zombie-dense networks face reduced credit access. (ii) Zombie firms, which are on average less productive than nonzombie firms, impede investment and employment opportunities at healthier firms. Nonzombie firms operating in sectors with a high prevalence of zombie firms experience lower sales, assets, and productivity. (iii) Incorporating B2B sales data structured similarly to firm-level input–output linkages, our study causally establishes that greater upstream or downstream exposure to zombie firms leads to reduced sales, investment, and employment growth compared to firms without zombie connections. Increased exposure to zombie firms significantly reduces markups, value-added, productivity, and EBIT margins due to cascading effects on production technology, shifting it toward lower value-added. Additionally, a higher share of zombies in the upstream sector reduces input costs for firms due to excess production.