The Literature Review of Zombie Firm Research

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Table of contents

  1. Introduction
  2. Literature Review
  3. Conclusion


The term of zombie is a concept that remains in our minds as living dead from horror movies. In recent times, this term has often been used to describe standing firms while it should have been closed a long time ago. Zombie firms are seemingly active, but use a huge part of their cash flows only to pay interest on their debts. Banks prefer to re-borrow these firms, restructure their bad loans instead of reducing the debts and taking them out of the financial statements. However, these inefficient and unproductive firms also consume capital that can be transferred to more productive and healthy firms. Therefore, these companies, like some living dead-zombies, live as long as the cash inflow which is considered as fresh blood for them continues and they put away the funds of other healthy firms. Productivity can be defined by how efficiently firms are able to use resources and can grow when labor and capital are increasingly allocated. In a competitive market, efficient and productive firms grow, less productive firms sink and exit the market. Zombie firms (insolvent or financial distressed enterprises etc.) that would typically exit in a well-organized market.

A spell made in Haiti was the root of the concept of zombies. And zombie is the name given to dead bodies played by sorcerers. It is expressed as consuming everything it finds without producing any value in popular culture (Platts, 2013). The concept of a zombie firm has been used since the late 1980s and the occurrence of zombie firm theory has already been intensely studied mainly in the case of Japan. One reason for zombie firm occurrence is related to the decline in financial pressure as a result of low interest rates in market.

These inefficient and unproductive firms also consume capital that can be transferred to more productive firms. Banks prefer to re-borrow these firms and restructure their bad loans instead of reducing the debts. Therefore, these firms live as long as the cash inflow from lending and the survival of them may be an unwanted effect of the incentives that banking regulation generates. In addition, banking sector are stimulated negatively by zombie firms, such as bank’s share value can decrease. A bank may choose to refinance zombie firms rather than facing with losses, but the latter would reveal substantial losses on existing loans when faced with restructuring or extending a loan. If the bank’s capital is already close to its regulatory edge, then a large-scale restructuring of its loans might cause the need for costly recapitalization. So that there is a paradox that zombie firms make zombie banks or zombie banks make zombie firms (Hoshi, 2006; Fukuda and Nakamura, 2011; Nakamura; 2016, Goto and Wilbur, 2019). The purpose of this study is to search and examine of zombie firm research in the literature.

Literature Review

Caballero, Hoshi, Kashyap (2008) examined the effects of zombie firms that how zombies conceal the normal competitive process. They found that congestion by the zombies reduces the profits for healthy firms and zombie firms influenced industries have more depressed job creation and destruction, and lower productivity. Kobayashi and Osano (2011), the risk of withdrawal of non-main banks is more likely to force the main bank to accomplish efficiently in handling troubled loans, thereby avoiding problems with zombie firms, if the potential cash flow of the firm decreases or increases relative to the amount funded by non-main banks.

Fukuda and Nakamura (2011) investigated recovery reasons of zombie firms in Japan in the first half of the 2000s with an extended method of previous studies. They categorized as zombies from among the listed firms and found that reorganization such as decreasing the employee strength and selling unnecessary fixed assets was effective for the recovery of troubled firms. Especially, increasing special losses supported the recovery but increasing special profits through the sale of main assets was negative to the recovery of zombie firms. Zombie firms’ recovery also effected by external support and interventions such as debt relief and capital reduction. Jaskowski (2015) showed that zombie lending may be an optimal strategy for a bank in some cases as it leads to greater lending ex-ante and prevents further losses from fire sales. It is a side effect of market incompleteness and ex ante welfare improving. Capital injection into the banks would not solve any problem about zombie lending but direct purchase of the collateral on the market would certainly lessen the problem of zombie lending.

Kwon, Narita and Narita (2015) investigated how resources were reallocated in Japan during the 1990s by measuring aggregate productivity growth using plant-level data of manufacturers from 1981 to 2000. They found that the contribution to aggregate productivity growth of resource reallocation deteriorated in the 1990s and became negative during the late 1990s. And also indicated that misdirected lending by banks to zombie firms allowed them to avoid reducing production inputs. Imai (2016) estimated the prevalence of zombies among Japanese Small and Medium sized firms, their borrowing and investment behaviors with a panel dataset for the period 1999-2008. 4-13% of Small and Medium sized firms were zombie firms during the period 1999-2008. Borrowing function reveals that Small and Medium-sized zombie firms did not change their loans in response to a change in land values due to ever greening. The profitability of investment which is measured by marginal q, did not have positive effects on investments of zombie firms. Tan, Huang and Woo (2016) found that government investment boosted the performance of zombie firms and crowded out the growth of private firms from a data set of Chinese firms between 2005 and 2007 period. And also found that the higher the concentration of state-owned banks and the more conducive is the environment for nurturing zombie firms.

Mcgowan, Andrews and Millot (2017) showed in OECD paper that there is opportunity to develop the insolvency rules in order to lessen the barriers to reorganization of weak firms and the personal costs related with business failure. Problems as zombie firm may relatively stem from bank tolerance and more forceful policy to resolve non-performing loans can be effective by complementary reforms to insolvency regimes. De Barros and Pereira (2017) found that between 5.2% in 2008 and 12.5% in 2013 of firms in the market were zombies between 2008 and 2015 in the Portuguese non-tradable sectors of construction and services. They also supported the theoretical predictions and previous empirical results that a greater zombie existence in construction and services has significant negative implications on healthy firms operating in the construction and services sector. Jiang, Li and Song (2017) examined why zombie enterprises are stiff but deathless with data on China’s Shanghai and Shenzhen A-share listed firms between 2009 and 2016. They found that these firms are able to remain eagerly due to government support in the form of increased subsidies and bank loans.

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Lam, Schipke, Tan and Tan (2017) illustrated the principal role of zombies and their strong connections with state-owned firms in funding to debt weaknesses and low productivity with using novel firm-level industrial survey data. They showed that weak firms can generate significant gains in long-term growth per year and also operational reorganization through divestment and decreasing redundancy have significant welfares in restoring zombie firms’ performance. Shen and Chen (2017) documented the problems of over-capacity and zombie firms between 2011 and 2013 with using firm level data of Chinese manufacturing. They found that the over-capacity problem is much more intense in the northeastern and western regions of China, especially in heavy chemical industries and in state-owned sector. And also zombie firms ground and worsen over-capacity by crowding out healthy firms.

Chen, Du, Wu, and Zhou (2017) analyzed the development trend, also macroeconomic environment and industries, the share of zombie firms in Chinese listed firms from 2007 to 2015 with modified Fukuda Nakamura Caballero Hoshi Kashyap (FN-CHK) method to detect zombie firms by incorporating non-recurring gains and losses. They suggested that government should abide by supply-side reform and manage well selected industry policy. Storz, Koetter, Setzer and Westphal (2017) explored the link between zombie firms and bank health and the magnitudes for aggregate productivity in 11 European countries. They found that zombie firms were more likely to be related to weak banks and partly stem from bank tolerance to them. The increasing continued existence of zombie firms overburden for markets and limits the growth of healthy firms.

Schivardi, Sette and Tabellini (2017) found that undercapitalized banks were less likely to cut credit to non-viable/zombie firms, credit misallocation increased the failure rate of healthy/non-zombie firms and reduced the failure rate of non-viable firms and the adverse effects of credit misallocation on the growth rate of healthier firms were unimportant during the Eurozone financial crisis. In their research, they used a dataset that covers almost all bank-firm relationships in Italy between 2004 and 2013. Urionabarrenetxea, Merino, San-Jose and Retolaza (2018) showed firms with negative equity that continue to do business despite having lost their entire equity which they called extreme types of zombie firm. They explained how these firms are measured and how the riskier ones are defined with different determinants with using a Spanish sample from 2010 to 2014 an index called the EZIndex. They developed a method for ranking zombie firms based on risks and changes over time and demonstrated important implications that need to be considered by the competent authorities because zombie firms are less regulated, large and located in regions with large business fabrics.

Hallak, Harasztosi and Schich (2018) identified the occurrence of zombie firms across European countries and the effects of such incidence on the asset growth, employment growth and productivity of non-zombie firms. The result showed that the larger the share of zombie firms in a country the lower the growth of non-zombies in that country. They found young non-zombies were most affected by other zombie firms as congestion effects and zombies were spreading in Europe. He, Li, and Zhu (2018) documented that firms’ political relations have a positive effect on becoming insolvent and unproductive with using a sample of privately owned listed firms in China. They found that this situation is more clear-cut for firms located in regions with extensive government intervention or weak institutional condition. On the other hand, the existence of zombie firms has larger negative spillover effects on the investment and productivity of healthy firms compared with zombie firms in the same industry for firms without political networks. In addition, negative spillover effects are not detected for firms with political networks.

Huang and Zhang (2018) examined outward foreign direct investment of the firms without productivity advantages as called zombie firms with using Chinese manufacturing firm-level data between 2002-2005. They found that some zombie firms got financial maintenance from government to conduct outward foreign direct investment. Banerjee and Hofmann (2018) investigated a ratcheting-up in the prevalence of zombies since the late 1980s with using firm-level data on listed firms in 14 advanced economies. They found that zombie firms’ increase is linked to reduced financial pressure in the effects of lower interest rates.

Gouveia and Osterhold (2018) assessed the role of zombies on firm dynamics with using firm-level dataset for one of the OECD countries, Portugal. They confirmed the results on the high frequency of zombie firms, considerably less productive than their healthy equivalents and thus lowering productivity down. Furthermore, they found evidence of positive choice within zombies, with the most productive restructuring and the least productive exiting, they also showed that the zombies’ productivity threshold for exit is much lower than that of non-zombies, allowing them to stay in the market, distorting competition and sinking wealth. Goto and Wilbur (2019) focused on zombie firms among small and medium-sized enterprises about Japan’s zombie firms and found that many zombie firms exist among SME and zombie firm ratio increases as firm size decreases. Du and Li (2019) identified zombie firms in the energy industries with a modified method and used the survival analysis model to check the impact of environmental regulation on the market exit of zombies. They found that environmental regulation can speed up the exit of zombie firms to attain the governance of extra capacity for energy firms.

Dai, Qiao and Song (2019) used a modified identification method to identify zombie firms from a large sample of coal mining firms in China and analyzed the prevalence of zombie firms over time and their distribution across different regions and ownership types. They also investigated the causes of the emergence of zombies and evaluates the effectiveness of various restructuring actions for resolving zombie firms. They found that government interferences and subsidized bank credit are important causes of zombie firms, and uninterrupted financial support from the government or banks does not contribute to the recovery of zombie firms. Andrews and Petroulakis (2019) explored the linking between zombie firms and bank health and the consequences for total productivity in 11 European countries. In the results of their study, zombie firms are more likely to be linked to weak banks, the increasing survival of zombie firms congests markets and pressures the growth of more productive firms.

Rodano and Sette (2019) showed the results of different methods for the assessments of the existence of zombie firms in Italy. They used OECD’s measure (Mcgowan, Andrews and Millot 2017) for comparison which identifies zombie firms based on criteria such as firm age and interest coverage ratio. They found that profits taken before amortization and depreciation or after amortization and depreciation have different results. Especially, profits after amortization and depreciation has numerous adverse features such as to overestimate the share of capital trapped into zombie firms, inadequate in predicting the future performance of firms, classifying firms as zombies in a specific year which invested heavily in previous years and amortized that investment quickly and unsuitable for cross-country evaluations.


In this study, it is tried to give the literature review about zombie firm researches. Although the definition of a zombie firm is not included in the literature preciously, it is seen that there are two different classes for the zombie firm when it is examined. It can be said that the first definition of zombie firm is based on the banking system and the second on interest expenditures. These definitions can in fact be expressed as a kind of measurement method. In determining the firms as zombies, interest coverage ratio is mostly used as a measure. In the interest coverage ratio formula, earnings before interest and tax or earnings before interest, tax, amortization and depreciation are used. These measurement methods give different results. As a result of the literature review, it is among the most prominent features that zombie companies are indebted too much, long-term debts can only pay their interest, be part of the weak banking system, be influenced by the sectoral policies of the state, and infect the healthy firms as zombie effect after a while. In the studies to be carried out with zombie firms, it is suggested to researchers to develop models that will determine the spread rate better, measurement methods to improve interest coverage ratio and exit solutions of zombies from outside of competitive market.

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