Beyond the Twilight Zone: The Restructuring and Resurrection of Zombie Firms

Abstract

Zombie firms—businesses with operating profits persistently insufficient to cover debt servicing costs—distort economic growth by crowding out healthy firms. Despite their economic importance, the survival factors of these firms remain understudied. Using two complementary approaches, we investigate an overlooked aspect of zombie firms: their restructuring activities. First, using traditional financial statement measures, we find that restructuring activities focused on operational improvements significantly contribute to zombie revival. Second, we use FinBERT, a deep learning language model, to analyze corporate disclosures and distinguish between operational and financial restructuring activities. Our advanced textual analysis shows that operational restructuring activities strongly predict zombie firm recovery, whereas financial restructuring alone does not. Furthermore, recovered zombie firms demonstrate superior operational efficiency compared to non-recovered peers. These findings contribute to the accounting literature on corporate disclosure and our understanding of firm recovery mechanisms, with implications for managers, regulators, and policymakers.

Keywords: zombie firms, zombie recovery, operational restructuring, natural language processing, textual analysis, restructuring