How does government intervention affect the formation of zombie firms?

Yong

Journal of Business Economics and Management

2021

This study tests how different types of government funding affect the recovery of zombie enterprises in the manufacturing sector of China. The results show that funding for production and innovation can revive zombie enterprises in expanding industries, while funding for interest cannot. Furthermore, funding for production and innovation can share costs, increase investment in selling or innovation, and promote the scaling down of businesses through external governance effects, helping zombie enterprises to recover. Finally, none of the funding types can revive zombie enterprises in contracting industries; these can recover only through access to larger overseas markets.

Section: Introductionmentioning

confidence: 99%

Can Government Funding Revive Zombie Enterprises? Evidence From Listed Chinese Manufacturing Enterprises

Yong

Journal of Business Economics and Management

2021

“…Tracey (2019) estimates that zombie lending caused a significant decline in aggregate output, investment, and TFP growth in Euro-zone countries during the sovereign crisis. In China, Chang et al (2021), Shen and Chen (2017), and Lam et al…”

Section: Economic Consequences Of Zombie Lendingmentioning

confidence: 99%

“…Therefore, even though government officials may recognize the negative impacts of zombie lending on the long-run productivity growth, they may still allow zombie lending. They may even provide additional subsidies or tax allowance to inefficient zombie firms in order to preserve jobs (Jiang et al 2017;Chang et al 2021). In addition, closing down all zombie firms at once may go against the general public interests.…”

Section: Why Does Zombie Lending Happen?mentioning

confidence: 99%

“…I follow the seminal paper by Rajan and Zingales (1998) to create a crossindustry index that captures the difference in need for external finance. 18 For each firm in a particular industry, Rajan and Zingales (1998) first calculate the difference between investment and cash generated, and they divide the difference by the firm's capital expenditure. Then, they define the external finance index as the median of all derived values from the previous step within that particular industry.…”

Section: External Finance Index and Tankan Indexmentioning

confidence: 99%

“…The firms may need external sources of funding -either by borrowing from banks or raising money in the financial markets -to fill in that gap between investment and cash flow. 20 Next, for each in- 18 Rajan and Zingales (1998) develop this index to estimate the differential effects of financial market development on industry growth. 19 Since the external finance index created by Rajan and Zingales (1998) only covers the manufacturing industries based on the U.S. census data, I construct a new external finance index for my analysis on zombie lending in Japan.…”

Section: External Finance Index and Tankan Indexmentioning

confidence: 99%

See 2 more Smart Citations

Zombie “Landing” On Local Labor Markets

Cheung¹

Japan's construction and real estate firms borrowed heavily from banks in the late 1980s, but many of them became insolvent when the real estate bubble burst in 1991. Instead of recognizing or restructuring problem loans, Japanese banks continued their loans to these "zombie" firms in order to hide the extent of non-performing loans and avoid immediate loss being added to their balance sheets. The literature shows two channels via which zombie lending affects allocative efficiency: (1) loans to zombie firms could be allocated to more productive firms and (2) the presence of inefficient, but subsidized zombie firms deters entry of productive new firms. In this paper, I propose an additional mechanism via which zombie lending undermines allocative efficiencyzombie lending allows unviable construction projects to continue and hoard inputs that may have better alternative uses. Since construction projects mostly hire low-skilled workers without college degree, subsidized loans to construction industry effectively reduce the availability of these low-skilled workers to other industries, which, in turn, disproportionately slows down the growth of low-skilled industries. To empirically probe this mechanism, I put together an industry-level data set on output, employment, and capital utilization in each of Japan's 47 prefectures between 1992 and 1996. The results show that low-skilled industries experienced disproportionately lower growth rate in real value-added, employment, and capital stock in prefectures where zombie lending increased more. In addition, using the detailed data on the number of establishments by age, industry, and prefecture in the same period, I show that zombie lending also disproportionately slowed down firm entry in lowskilled industries. The results suggest that zombie lending disproportionately harmed the growth of low-skilled industries that competed for non-college educated workers with zombie industries in a local labor market in Japan.

Grabbing hand or helping hand? Ownership interventions and acquirers returns; the role of provincial idiosyncrasies

et al. 2020

Firm's performance is not only influenced by sound decisions but also by institutional processes. This study argues that the effect of government intervention on acquisition returns is partly dependent on institutional factors such as provincial marketization and the legal environment. This study employs ownership and merger and acquisition regulations issued by the Chinese government 2003–2018 to measure government intervention and also employs both the OLS and the random effects technique. The result shows a positive relationship between ownership intervention and acquisition returns. Next, the study finds that variances in regional marketization and the legal environment strengthen this relationship such that acquirers in high marketization regions and acquirers in a robust legal environment earn higher returns than acquirers in a low marketization region and acquirers in a weaker legal environment. The results imply that acquisition returns are not even across all locations in a transitional economy. Ongoing policies should aim at bridging the variances in different locations as it impacts acquirers' returns.