Working Paper: NBER ID: w29904
Authors: Viral V. 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 lending; credit misallocation; economic inefficiency
JEL Codes: E44; E58; G01; G2; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| subsidized credit to distressed firms (H81) | economic inefficiencies (D61) |
| undercapitalized banks (G21) | perpetuation of zombie firms (L26) |
| weak banks continue to lend to distressed firms (G21) | avoid recognizing losses (G41) |
| zombie firms (G33) | misallocation of credit (E51) |
| subsidized loans (H81) | aggressive pricing strategies of zombie firms (L11) |
| aggressive pricing strategies of zombie firms (L11) | negative impact on healthy firms (G32) |
| presence of zombie firms (G33) | lower investment and productivity (E22) |
| interest rate subsidies (E43) | spillover effects of zombie lending on non-zombie firms (E44) |
| presence of zombie firms and subsidized financing (G32) | low growth and inefficiency in capital allocation (D25) |