Throwing Good Money After Bad: Zombie Lending and the Supply Chain Contagion of Firm Exit

67 Pages Posted: 14 Jul 2021

See all articles by Yun Dai

Yun Dai

Lingnan College, Sun Yat-Sen University

Xuchao Li

Wuhan University - Economics and Management School

Dinghua Liu

Wuhan University

Jiankun Lu

Zhejiang University of Finance and Economics (ZUFE)

Date Written: June 28, 2021

Abstract

This paper studies whether the bailout of downstream firms helps stop the supply chain propagation of business failure. By analyzing persistent zombie lending in China, we show that such a bailout policy does not work. Zombie lending to downstream firms does not reduce the exit likelihood of upstream firms. Worse, it distorts efficiency-based firm exit in upstream industries. The exit distortion effect works through the trade credit chain and is more profound in industries with stricter financial constraints and tighter supply chain connections. Our findings reveal the importance of credit allocation efficiency for the Schumpeterian process of creative destruction that is essential for economic growth.

Keywords: Supply chain, Exit contagion, Zombie lending, Creative destruction, Trade credit

JEL Classification: G33; H25; O16

Suggested Citation

Dai, Yun and Li, Xuchao and Liu, Dinghua and Lu, Jiankun, Throwing Good Money After Bad: Zombie Lending and the Supply Chain Contagion of Firm Exit (June 28, 2021). Journal of Economic Behavior and Organization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3875936

Yun Dai (Contact Author)

Lingnan College, Sun Yat-Sen University ( email )

Guangzhou
China

Xuchao Li

Wuhan University - Economics and Management School ( email )

Wuhan, Hubei
China

Dinghua Liu

Wuhan University ( email )

Wuhan
China

Jiankun Lu

Zhejiang University of Finance and Economics (ZUFE) ( email )

Hangzhou, Zhejiang Province 310018
China

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
37
Abstract Views
150
PlumX Metrics