How Does Competition Affect Zombie Firms?

This paper analyzes the effects of product market competition on zombie firms in the US. We show that the asset-weighted share of zombie firms at the industry level decreases significantly with more competition. This decrease is mostly pronounced in industries characterized by a low concentration and low margins. Moreover, neither the exit or default probability, nor the recovery likelihood are significantly affected by changes in competition. Finally, at the firm level, zombie firms grow more slowly, reduce their total assets and cash holdings, issue less equity, and obtain smaller loans with more competition. These findings suggest that zombie firms adapt to higher competition by reducing the size of their business.

Keywords: D22, E44, G31, G32, G33 Zombie firms, Product market competition, Financial policies

JEL Classification: D22, E44, G31, G32, G33

Suggested Citation: Suggested Citation

Brunner, Marc and De Martiis, Angela and Valta, Philip, How Does Competition Affect Zombie Firms? (June 20, 2024). Available at SSRN: https://ssrn.com/abstract=4310399 or http://dx.doi.org/10.2139/ssrn.4310399