Who pays when zombie firms Persist? Asymmetric debt conditions by credit rating

We examine how zombie firm prevalence relates to debt financing conditions for viable firms in a bank-based economy. Using firm-level panel data from South Korea, we find that a higher share of zombie firms within an industry is associated with higher borrowing costs for non-zombie firms, without a significant reduction in their debt growth on average. However, the relationship is highly asymmetric; low-rated non-zombie firms exhibit both elevated interest rates and restricted credit access. Moreover, the adverse effects of zombie prevalence are more pronounced in the service sector than in manufacturing and during periods of monetary easing than tightening. This pattern reflects the heightened sensitivity of such contexts to macro-financial conditions. Our findings highlight credit policy frameworks that incorporate firm-level risk sensitivity and context-dependent amplification.