Recovery and exit of zombie firms in Portugal

Abstract

The resources sunk in zombie firms have risen over the last two decades, hampering productivity growth in developed economies. In this paper, we examine the recovery and exit of zombie firms among small- and medium-sized enterprises (SME), as well as the determinants of these transitions. To our knowledge, this is the first study on the determinants of the probability of a zombie recovering or exiting in a European context. The study also contributes to the discussion of the definition of zombie firms. Based on a panel of Portuguese manufacturing and services firms covering the 2004–2017 period, we do find a widespread presence of zombies. As expected, they are relatively less productive than non-zombies, while the probability of transition into recovery and exit is relatively low, which we interpret as evidence in favour of the presence of high barriers to firm mobility. In turn, the regression results show that downsizing and restructuring, as well as debt restructuring, are crucial in enhancing recovery of zombie firms. These are non-trivial results from the perspective of managers and policy makers. We performed several exercises using alternative definitions of zombie firms and estimation techniques and found that our findings are robust.Plain English Summary A 1% decline in the share of highly indebted and unprofitable firms (i.e. zombies) is estimated to increase the average labour productivity by 3.1 percent. Recovery of zombies in particular can be enhanced by downsizing and restructuring. Based on a very large panel of Portuguese small- and medium-sized manufacturing and services firms, covering the 2004–2017 period, we do find a widespread presence of zombie firms. Moreover, the chance of these firms to recover or exit is relatively low, an evidence of the presence of high barriers to firm mobility and resource misallocation. Our results have important managerial and policy implications: (1) a coordinated and holistic restructuring strategy (technological, operational and debt-related) is crucial to increase the likelihood of recovery of weak companies; (2) governments should formulate an adequate institutional framework in order to strengthen the selection of zombie firms, namely by designing more reallocation-friendly insolvency regimes and discouraging creditors to refinance unviable firms.

Zombie Companies in Business Environment in Emerging Economies: Case of Turkey

“…By considering the literature, it can be seen that there are limited studies about zombie companies and also these studies cover general information Carreira et al, 2021) or current status in countries from the zombie company's perspective (Becker, 2021; or policies about zombie companies (Zhao et al, 2021). As mentioned before, there is a research gap about specifying the factors that cause companies to turn into zombie companies.…”

Zombie Firms during and after Crisis

“…It turns out that a certain development, usually a major economic event, can turn healthy firms into zombies. This was firstly evidenced by studies conducted by Japanese economists investigating problems related to the Japanese economic stagnation early after the year 2000 (e.g., Ahearne and Shinada 2005;Caballero et al 2008;Kwon et al 2015) and later by researchers from other countries dealing with the effects of the global financial crisis in 2008 on the phenomena of zombie firms (e.g., Broz and Ridzak 2017;Banerjee and Hofmann 2018;Carreira et al 2021). At present, other publications highlight the risk of the proliferation of zombie firms in connection with the economic crisis caused by the COVID-19 pandemic (e.g., Zoller-Rydzek and Keller 2020; Dursun-de Neef and Schandlbauer 2021), which is an important impetus for realizing the need for this research.…”

“…Economists and scholars are increasingly addressing this issue (e.g., Kwon et al 2015;Broz and Ridzak 2017;Banerjee and Hofmann 2018;Carreira et al 2021;Copus et al 2022) with the specific focuses of existing research on bank behavior known as "zombie lending" 2 of 11 or "evergreening" (see, e.g., Caballero et al 2008;Shimizu 2012;Acharya et al 2019), on the emergence and role of zombie firms in the context and countries (see, e.g., Urionabarrenetxea et al 2016Urionabarrenetxea et al , 2018De Martiis and Fidrmuc 2017;Blažková and Dvouletý 2022), and on the causes of zombies' survival (see, e.g., Iwaisako et al 2013;Asanuma 2015); however, current developments show that interest in the existence and persistence of these companies in the market is renewed especially after periods of economic crises. It turns out that a certain development, usually a major economic event, can turn healthy firms into zombies.…”

The Role of Zombie Firms in Industrial Sustainable Development: Evidence From Yangtze River Delta Urban Agglomerations

“…However, it is predominantly concerned with market congestion and aggregate growth difficulties (Caballero et al, 2008;Adalet McGowan et al, 2018;Andrews and Petroulakis, 2019). With the exception of the research by Goto and Wilbur (2019) and Carreira et al (2021), most of the existing research is based on the samples of large listed companies, and the zombie firm problem of other enterprises has not been explained in detail. In addition, the majority of extant research only focuses on the state of zombie firms at the national level, rather than taking China's special economic zones into account.…”

“…However, the implementation of scaling down (or restructuring) necessitates two important prerequisites: improved bank supervision and the perfection of the bankruptcy restructuring system (Nakamura, 2017;Andrews and Petroulakis, 2019). Effective restructuring policy, like debt restructuring, and reduction of corporate restructuring barriers will also help zombie firms back to good financial health and promote their recovery (Adalet McGowan et al, 2018;Carreira et al, 2021). For developing countries, governments should utilize the appropriate "helping hands" to assist healthy enterprises with the potential to develop further based on market-oriented principles, so as to gradually dispose of the problems of zombie firms.…”