Global Zombies

Abstract

We propose a two-step filtering process using interest coverage ratio and default prediction models to measure the extent of “zombieism” globally: a phenomenon that describes the existence of companies that are insolvent but continue to survive due to unusual market conditions and the support of financial institutions and government. We find that the average share of publicly traded zombie firms in the world's 20 largest economies increased significantly in the past 30 years, at above 7% at the end of 2020. We also find that financial market development, creditor rights, and debt enforcement efficiency help explain cross-country variations in zombie ratios. Using staggered bankruptcy reforms in eight countries after 2000 as an exogenous variation to the modernization of bankruptcy law, we find that the zombie ratio declines by 1.5 percentage points after the reforms in those countries, specially if the reforms aim to strengthen creditor rights.

Keywords: Zombie Firms, Financial Distress, Interest Coverage, Z-Score, COVID-19, High-yield Debt, Creditor Rights, Bankruptcy Code

JEL Classification: G15, G18, G30, G33, G38