Wei Wang
Professor & Bank of Montreal Professor of Business and Finance
- Adapted from: “Global zombie companies: measurements, determinants, and outcomes ”
- Based on Research by: Edward I. Altman, Rui Dai, Wei Wang
- Journal: Journal of International Business Studies
Key Takeaways
- Zombie firms hinder economic growth and healthy business development because they create significant market congestion, which limits investment, sales, and employment growth among healthy firms and discourages new market entrants.
- Lenient monetary policies, economies with abundant credit, and expanding high-yield corporate debt markets can unintentionally sustain zombie firms. The persistence of zombie firms potentially exacerbates inefficiencies and delays necessary economic restructuring.
- Countries that implement substantial bankruptcy law reforms reduce zombie firm prevalence by an average of 1.4% and accelerate economic renewal. These reforms also shorten the time zombie firms remain in the market by 25%, accelerating their exit through liquidation or restructuring and freeing up resources for more productive uses.
Zombie firms are companies that cannot pay their debts but keep operating thanks to ongoing support from banks, investors, or governments, especially during tough economic times. This study introduces a new way to identify zombie firms by combining two financial measures: the interest coverage ratio and a default risk score. By applying this method to data from the world’s 20 largest economies between 1990 and 2021, the researchers found that the share of zombie firms among publicly traded companies grew from about 1.5% in 1990 to over 7% in 2020, with smaller businesses more likely to become zombies. The COVID-19 pandemic did not significantly change the zombie firm ratio, likely because government and central bank interventions helped keep many struggling companies afloat.
The presence of zombie firms has real consequences for the broader economy. When there are more zombie firms in an industry, healthy companies in that sector tend to invest less, grow more slowly, and hire less, which creates a congestion of sorts and makes it harder for new and healthy businesses to thrive. The study also found that countries with strong economic growth and healthy credit ratings have fewer zombie firms, while those with more small and young companies or those with easy access to credit and high-yield debt markets tend to have more zombies. The expansion of global debt markets, especially high-yield bonds, has made it easier for financially weak firms to survive, increasing the number of zombie companies.
According to the study, reforms to bankruptcy laws can be effective in reducing the number of zombie firms. In countries that made their bankruptcy laws more creditor-friendly, the share of zombie firms dropped by about 1.4 percentage points, and these firms exited the market more quickly—on average, 25% faster. Most zombie firms either go bankrupt or are delisted within five years of being identified, with only a small fraction recovering. The research suggests that policymakers can use these insights to design better financial and legal systems that encourage the healthy turnover of businesses and support stronger economic growth.