Working Paper: CEPR ID: DP16685
Authors: Viral Acharya; Matteo Crosignani; Tim Eisert; Sascha Steffen
Abstract: This paper surveys the theory on zombie lending incentives and the consequences of zombie lending for the real economy. It also offers a historical perspective by reviewing the growing empirical evidence on zombie lending along three dimensions: (i) the role of under-capitalized banks, (ii) effects on zombie firms, and (iii) spillovers and distortions for non-zombie firms. We then provide an overview of how zombie lending can be attenuated. Finally, we use a sample of U.S. publicly listed firms to compare various measures proposed in the literature to classify firms as ``zombies." We identify definitions of zombie firms that are adequate to investigate economic inefficiency in the form of real sector competitive distortions of zombie lending. We find that only definitions that are based on interest rate subsidies are able to detect these spillovers and thereby provide evidence in support of credit misallocation.
Keywords: zombie; credit; credit misallocation; capital misallocation; bank capital; undercapitalized banks; interest rate subsidy; spillovers
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Economic shocks (F69) | prevalence of zombie lending (G21) |
| Undercapitalized banks (G21) | zombie lending (G21) |
| Undercapitalized banks (G21) | subsidized loans to distressed firms (H81) |
| subsidized loans to distressed firms (H81) | misallocation of credit (E51) |
| misallocation of credit (E51) | diminished overall economic performance (F69) |
| Zombie firms (G33) | distort competition (L13) |
| distorted competition (L13) | reduce investment and employment growth in non-zombie firms (D25) |