Zombie companies are firms that continue to operate despite being unable to cover their operating costs and service their debt over an extended period. These companies are essentially insolvent and would typically be declared bankrupt, but they continue to exist due to external factors such as government bailouts or lenient lending conditions.
Characteristics of Zombie Companies
Inability to Service Debt
Zombie companies often operate with minimal profit margins, making it difficult for them to cover interest payments on their debt.
Dependence on External Support
These companies often survive on continuous borrowing, government support, or favorable credit terms rather than through operational cash flows.
Low Productivity
Zombie firms are typically marked by low productivity and suboptimal employment, contributing little to economic growth.
Economic Implications
Economic Distortion
The existence of zombie companies distorts the allocation of resources, as capital and labor remain tied up in unproductive enterprises.
Market Competition
Zombie firms can distort market competition by operating under conditions that would otherwise not be sustainable, thus potentially crowding out more productive and profitable companies.
Financial Stability
Rising numbers of zombie companies can signify higher risk within the financial system and contribute to economic instability.
Types of Zombie Companies
Government-Supported Zombies
These firms receive direct bailouts or subsidies from the government, preventing them from declaring bankruptcy.
Bank-Supported Zombies
These firms are kept alive by lenient lending standards or favorable refinancing terms from financial institutions.
Industry-Supported Zombies
Occasionally, companies within an industry may support a struggling peer to avoid sector-wide repercussions.
Historical Context
Post-Financial Crisis
Zombie companies became more prominent after the 2008 financial crisis, where many businesses survived on ultra-low interest rates and government support.
Japan’s Lost Decade
Japan provides a historical example of zombie companies during its “Lost Decade” in the 1990s, where banks continued to support insolvent firms, contributing to prolonged economic stagnation.
Recognition and Measurement
Financial Indicators
Ratios such as the interest coverage ratio (earnings before interest and taxes (EBIT) divided by interest expense) are often used to identify potential zombie companies. A ratio below 1 suggests a firm may be unable to cover its interest obligations from its operational earnings.
Economic Surveys
Various economic surveys and research papers aim to identify and analyze the impact of zombie companies within different economies.
Practical Examples
Airlines
During periods of economic downturn, such as the COVID-19 pandemic, several airlines operated under significantly reduced revenue and relied on government bailouts.
Retail Chains
Retail chains that struggle to compete with online retailers often become zombies, surviving mainly due to favorable credit terms and lease renegotiations.
FAQs
How do zombie companies impact the economy?
Why do banks support zombie companies?
Can zombie companies return to profitability?
Are zombie companies common in certain industries?
Related Terms
- Insolvency: The state of being unable to meet one’s financial obligations.
- Bankruptcy: A legal process in which a company or individual is declared unable to repay outstanding debts.
- Bailout: Financial assistance given to a company to prevent bankruptcy and allow it to continue operations.
- Economic Stagnation: A prolonged period of slow economic growth, often accompanied by high unemployment.
References
- Caballero, R. J., Hoshi, T., & Kashyap, A. K. (2008). “Zombie Lending and Depressed Restructuring in Japan.” American Economic Review, 98(5), 1943-1977.
- Acharya, V., Crosignani, M., Eisert, T., & Eufinger, C. (2019). “Zombie Credit and (Dis-)Inflation: Evidence from Europe.” ECB Working Paper No. 2240.
Summary
Zombie companies are a significant concern for economists and policymakers due to their implications for economic efficiency, market competition, and financial stability. Understanding their characteristics, historical context, and types help in addressing the systemic risks they pose. Despite their negative impact, zombie companies continue to operate due to external support, distorting the natural market dynamics and resource allocation.
This comprehensive exploration of zombie companies provides an in-depth understanding of their nature, effects, and the conditions under which they persist. By recognizing these entities, stakeholders can better navigate the economic and financial landscapes they influence.
