How Does Competition Affect Zombie Firms?
43 Pages Posted: 27 Dec 2022
Date Written: December 23, 2022
This paper analyzes the effects of product market competition on zombie firms in the US using a large sample of publicly traded firms. First, 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. Second, neither the exit or default probability, nor the recovery likelihood are significantly affected by changes in competition. Third, at the firm level, zombie firms grow more slowly, reduce their assets and cash holdings, issue less equity, and obtain smaller loans. These findings suggest that zombie firms adapt to higher competition by scaling down the size of the firm.
Keywords: Zombie firms, Product market competition, Financial policies
JEL Classification: D22, E44, G31, G32, G33
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