Fiscal stress and the formation of zombie firms: Evidence from China

Cai, Guowei; Zhang, Xuejiao; Yang, Hao

doi:10.1016/j.chieco.2021.101720

Cited by 31 publications

(13 citation statements)

References 21 publications

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“…Their poor financial situation (Ivana and Dvouletý 2020; Cai et al 2022) and their heavy dependence on government and bank credit subsidies are the two main characteristics of zombie firms. Relevant studies show that political connections can distort investment behaviour (Liu et al 2019), reduce investment efficiency (Li and Jin 2021), and weaken performance (Deng 2011) of enterprises.…”

Section: Research Hypothesesmentioning

confidence: 99%

“…Zombie firms have problems such as low productivity (McGowan et al 2018), insufficient innovation (Wang et al 2018), and poor profitability (Cai et al 2022). Zombie firms increase the cost of debt financing of non‐zombie firms (Yu et al 2020), squeeze out investment and employment in non‐zombie firms (Shen and Chen 2017; Wang and Zhu 2021); damage healthy firms associated with zombie firms (Dai et al 2021); and lead to ineffective allocation of financial capital (Geng et al 2021; Wang and Zhu 2021), which causes great harm to society (Kwon et al 2015).…”

Section: Introductionmentioning

confidence: 99%

“…Previous studies also considered that poor financial conditions (Ivana and Dvouletý 2020; Cai et al 2022), government intervention (Chang et al 2020; Geng et al 2021), and bank intervention (Caballero et al 2008) lead to the formation of zombie enterprises, but tended to ignore the important role of political connections in their formation (Bussolo et al 2022). Related studies show that political connections have a negative impact on investment behaviour (Liu et al 2019) and investment efficiency (Li and Jin 2021) of firms, which may lead to ‘zomibification’ of firms.…”

Section: Introductionmentioning

confidence: 99%

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How do political connections affect the formation of zombie firms? Evidence from Chinese manufacturing listed enterprises

Shao

Chen

Liu

2022

Asian-Pac Economic Lit

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Zombie firms that rely on government subsidies and bank loans have seriously affected the healthy development of economies. This paper uses data from Chinese listed manufacturing enterprises from 2007 to 2017 to test and analyse the relationship between political connections and zombie enterprises. The study finds: (i) political connections are positively correlated with the 'zombification' of enterprises; (ii) credit subsidies play an intermediary role between political connections and 'zombification' of enterprises, with the acquisition of large credit subsidies the main path to the 'zombification' of politically connected enterprises; and (iii) firms that have political connections may use credit subsidies for inefficient over-investment. This study has value for other countries in clarifying the causes of zombie firms and preventing politically connected enterprises from becoming zombie firms.

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Section: Research Hypothesesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

How do political connections affect the formation of zombie firms? Evidence from Chinese manufacturing listed enterprises

Shao

Chen

Liu

2022

Asian-Pac Economic Lit

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“…Chang et al (2021) and Zhang et al (2020)conclude that government intervention promotes zombie firms' formation by giving governmental subsidies, resources support, financial support, and decreasing tax. Cai et al (2022)find that government tends to protect firms with low profitability in order to get tax revenue, thereby causing the formation of zombie firms. Third, the characteristics of zombie firms formed under marketization factors.…”

Section: Literature Reviewmentioning

confidence: 99%

The effects of green credit policy on the formation of zombie firms: evidence from Chinese listed firms

Chen

2022

Environ Sci Pollut Res

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This paper examines the effects of the green credit policy on forming three types of "zombie firms," namely, credit-subsidized zombie firms, poorly managed zombie firms, and comprehensive zombie firms, considering the quasi-natural experiment of the implementation of the "Green Credit Guidelines" in 2004. In this paper, I implement a difference-in-differences method and use the data of all Chinese A-share non-financial listed companies from 2008 to 2017. The results show that the green credit policy attempts to inhibit the formation of credit-subsidized zombie firms by reducing bank loan subsidies and evergreen lending. However, the green credit policy promotes poorly managed zombie firms by strengthening firms' financial constraints and reducing the working capital and investment efficiency. The green credit policy has not shown a significant impact on comprehensive zombie firms. Moreover, the green credit policy has shown a more significant impact on state-owned firms, firms in industries that heavily rely on external financing and are highly competitive, and firms involved in high financial marketization areas.

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“…A growing number of literature focus on the effect of government behavior and the government system on zombie firms, such as government subsidies [11], government resource support [12], and political relationships [48]. Cai et al [49] show that the PMC fiscal reform can inhibit the formation of zombie firms, proving that the local governments' fiscal stress contributes to the formation of zombie firms. However, it does not explore why local government subsidizes zombie firms before the PMC fiscal reform and then reduces the support for zombie firms after the PMC fiscal reform.…”

Section: Literature Reviewmentioning

confidence: 99%

Like the new and hate the old: The impact of fiscal decentralization on regional development strategy

2022

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This paper evaluates the impact of China’s fiscal decentralization reform, namely the “Province-Managing-County” (PMC) fiscal reform, on local governments’ regional development strategy using county-level data in China covering 2000 to 2013. Surprisingly, after implementing the PMC fiscal reform, local governments will adjust their strategy of supporting zombie firms and attracting new firms, indicating that fiscal decentralization has changed the regional development strategies of local governments. We perform a difference-in-differences (DID) analysis and find that the PMC fiscal reform materially induces an average rise of 0.131 in newly added firms, an average decline of 0.383 in zombie firms, and no significant change in other firms. There is a pronounced substitution effect between zombie firms and newly added firms. We also find evidence supporting this argument: the government’s subsidy, tax treatment, and financial support. Our study provides empirical evidence that local governments’ regional development strategies can be affected by fiscal decentralization.

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Fiscal stress and the formation of zombie firms: Evidence from China

Cited by 31 publications

References 21 publications

How do political connections affect the formation of zombie firms? Evidence from Chinese manufacturing listed enterprises

How do political connections affect the formation of zombie firms? Evidence from Chinese manufacturing listed enterprises

The effects of green credit policy on the formation of zombie firms: evidence from Chinese listed firms

Like the new and hate the old: The impact of fiscal decentralization on regional development strategy

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