U.S. Zombie Firms: How Many and How Consequential?

Abstract

The unprecedented fiscal and monetary policy support in the wake of the COVID-19 pandemic has brought to the fore concerns that cheap credit could fuel the financing of zombie firms—that is, firms that are unable to generate enough profits to cover debt-servicing costs and that need to borrow to stay alive. Many observers have recently commented that zombie firms may crowd out lending to productive firms and erode the strength of the U.S. economy.

Uncertainty, Stock Prices, and Debt Structure: Evidence from the U.S.-China Trade War

“…The resulting share of zombie firms is thus around 7% in our sample, lower than the 10% reported in Favara et al (2021) for U.S. public firms.…”

“…The mitigating effect of bank debt is concentrated among the so-called zombie firms, defined as mature firms that are persistently unable to generate enough profits to cover their interest expenses. These firms have recently attracted growing attention from academic and policy circles (Favara, Minoiu, and Perez-Orive 2021) as well as public media, due to their potentially influential role in depressing economic growth, especially when bank credit is directed to keep the firms afloat. 4 We find that a zombie firm that derives half of its capital from bank debt has no negative stock price reaction to increased uncertainty, suggesting that bank debt plays an important role in insulating zombie firms from uncertainty shocks.…”

“…5 The share of zombie firms has been trending up across advanced economies, from below 2% of non-financial firms in the 1980s to around 12% nowadays, through upswings in the wake of economic downturns that are not fully reversed in subsequent recoveries. 6 For the United States, a recent note from the Federal Reserve Board (Favara et al 2021) suggests that around 10% of the public non-financial firms in 2020 are zombie firms, a number that can increase in the post-pandemic environment due to unprecedented fiscal and monetary policy support. 7…”

Can ESG boost zombie firms back to normal: Evidence from Chinese firms

“…Previous research has explored how to quickly dispose of zombie rms by using policy or marketing tools (Jiang et al, 2018), but existing researches ignore the possibility that zombie rms with relative development prospects and transformation capabilities can improve their independent ability. Facing the both pressures of COVID-19 and the economic downturn, the number of rms in zombie status has rebounded (Favara et al, 2021). Random bankruptcy liquidation may cause more harm to the economy and social stability, how to enhance the viability of these rms is the key to sustainable development.…”

Bringing Credibility Back to Macroeconomic Policy Frameworks

“…In the United States, corporate indebtedness has reached around 53 per cent of GDP, with nearly half of the issuance rated speculative by credit rating agencies. Much of this debt has also had the distortionary effect of sustaining companies with earnings less than their interest bill, commonly referred to as “Zombie” companies (Banerjee & Hofmann, 2018; Urionabarrenetxea et al ., 2018; Favara et al ., 2021). Perhaps most striking is the increase in household debt, particularly among advanced economies that have seen exponential increases in residential property prices.…”