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Tracking the Rise of Zombie Companies


The last 30 years have been good for the corporate walking dead. But for how much longer?

A man carries a briefcase, the image is covered with rust, dark green colors
iStock/FOTOGRAFIA INC. and Bill Cassidy

They look dead. They feed on the living. And they’ve been growing in numbers.

No, they’re not the meat-eating kind of zombies in movies and on TV, but the corporate ones—the companies that can’t pay off their debts, let alone turn a profit. Yet they keep staggering along with the help of ubiquitous cheap debt and the support of banks and governments.

Some economists have warned about the rising number of so-called zombie companies for years. They argue that these firms suck the life out of the economy by taking up resources—like a bank’s money—that could be spent on more efficient, productive companies.

The problem is that it’s been tough to know how widespread zombies are or why exactly they lurch on. Much of the research to date has looked at zombie companies in a specific country or through a particular economic channel. None of the research has examined the rise of zombies globally across several decades.

Wei Wang, Distinguished Professor of Finance at Smith School of Business, wanted to change that. So he recently teamed up with Rui Dai from the University of Pennsylvania’s Wharton Research Data Services and Edward Altman, the New York University finance professor known for his bankruptcy-predicting “Z-score” model.

Looking at the publicly listed companies in the world’s 20 largest economies, they found that the average number of zombies as a percentage of listed firms on stock markets grew from 1.5 per cent in 1990 to more than seven per cent in 2020 (see chart below). Only the 2008-09 financial crisis briefly interrupted the rise of zombie firms globally. In Canada, about three in 10 listed companies were walking dead in 2019—the most of any country on the list (more on that later).

Top 20 economies: fraction of listed zombie firms

The number of publicly listed zombie firms has risen dramatically over the past 30 years. This chart shows the percentage of listed firms that are zombies in the world’s 20 largest economies. On this chart, the definition of a zombie firm is a company with a three-year moving average interest coverage ratio of less than one and a three-year average Z-score of less than zero.

Yet as hair-raising as these numbers are, death blows could be coming soon. With a recession looming in 2023, bond and loan market liquidity is drying up. And those firms that can find willing lenders are facing big borrowing costs as interest rates rise.

Wang doesn’t like to make predictions, but he can confidently make one: “For sure, some of these zombies will die.” The only question is when. 

Unmasking the dead

Tracking zombie companies isn’t easy. That’s because experts haven’t always agreed on how to define one. The typical method only uses an interest coverage ratio. In other words, if a company can’t pay the interest on its loans, then it’s a zombie.

But Wang thinks that definition is too liberal. “There are companies that are in the high-growth stage, they cannot pay their current interest, but they can refinance all the time to keep growing,” he says. “It’s hard to call them zombies.” Tesla, for example, could have been called a zombie.

So, wanting a more nuanced definition, Wang, Dai and Altman devised an innovative two-step filtering process. Step one used a three-year moving average of interest coverage ratio, while step two used a modified version of Altman’s Z-score, which took into account things like a firm’s profitability, insolvency and liquidity. Their findings appear in a new research paper called “Global Zombies.”

While they found a huge growth in the percentage of public zombie firms worldwide over the past few decades, they also found lots of cross-country variation. In the U.S., for example, there has been a steady upward trend in the fraction of listed zombies. On the other hand, zombies are trending down in China, Japan and Germany. 

Too small to fail

So what’s going on here? Why the growth? And why the variation from country to country?

Wei and his colleagues looked at that as well and found several reasons for the rise of zombies. Chief among these was the worldwide explosion of corporate debt instruments, especially high-yield bonds and leveraged loans, combined with record-low interest rates over the past 30 years. Not surprisingly, struggling companies can plod on when they have easy access to low-interest debt.

There are other variables at play though, too, says Wang. For instance, countries with strong creditor rights, efficient debt enforcement and reformed bankruptcy laws were found to have a lower fraction of zombie firms. Take Brazil, China, France, India, Japan, Italy, Spain and the U.K.—each of which introduced major bankruptcy reforms between 2000 and 2009. The researchers found that on average these countries reduced their fraction of zombie firms by 25 to 30 per cent.

And then there are the countries with many small public companies and relatively little manufacturing activity in stock markets, like Canada and Australia. Smaller companies have a much greater likelihood of being zombie firms, so these countries tend to have higher zombie ratios. Canada and Australia have the highest number of listed zombie firms (29 per cent for Canada and 21 per cent for Australia in 2019). But they also have the largest portion of small companies in their public markets (76 per cent for Canada and 73 per cent for Australia). By comparison, only nine per cent of listed U.S. companies were zombies in 2019. But among small enterprises, the ratio was 43 per cent.

Why do countries like Canada tend to prop up their zombies? This one puzzled Wang at first. But then he started thinking about the importance of small companies to these countries and the types of public companies that exist there. In Canada, for instance, there are a lot of small public mining and energy exploration companies. “Banks or just the government in general have what we call a ‘too small to fail’ strategy,” he says. “Small businesses are very important to these countries, so banks have a tendency to sustain them, whether it’s for the goal to maintain employment or not.”

The death knell tolls

These too-small-to-fail strategies were on full display during the Covid-19 pandemic when governments around the world doled out billions for banks to subsidize small firms.

Interestingly, though, as Wang, Dai and Altman found, the zombie ratio barely changed from 2019 to 2020. This was likely because all that government money—and the small zombies it fed—was balanced by the number of large companies that declared bankruptcy in 2020.

That balance likely won’t tip in the zombies’ favour much longer, however, says Wang. While 2021 saw fast GDP growth and low numbers of bankruptcies, economies are now slowing. All of those zombies that were able to delay restructuring and bankruptcy can no longer rely on institutional support, let alone those bountiful debt markets and low interest rates.

And yet the final blows may be delayed, says Wang. The reason is the same as for homeowners with fixed mortgage rates. “I think what’s going to happen is some of those companies that locked in good rates probably will not die immediately. They may have a runway to survive for a few years.”

Are they delaying the inevitable? Maybe, says Wang. “Time will tell. As Warren Buffet once put it, ‘Only when the tide goes out do you discover who’s been swimming naked.’”