Corporate zombies: Anatomy and life cycle

BIS Working Papers  |  No 882  | 
02 September 2020
by Ryan Niladri Banerjee and Boris Hofmann
PDF full text
(8,326kb)
  |  56 pages

Focus

We analyse zombie firms, defined as unprofitable firms with low stock market valuation. Our analysis takes a longer-run international perspective using firm-level data on listed non-financial companies covering 14 advanced economies and spanning three decades.

Contribution

Documenting the rise of zombie companies over the past three decades, we explore their anatomy and life cycle. Their anatomy is analysed in terms of their economic and financial characteristics and performance, as compared with those of non-zombie firms. To flesh out a zombie firm's life cycle, we study how key balance sheet and profit account items move in the years before and after the firm first becomes a zombie. We further document what happened to zombie firms over time, zooming in on those firms that have managed to recover from zombie state.

Findings

We find a rise in the share of zombie firms from 4% in the late 1980s to 15% in 2017. These zombie firms are smaller, less productive, more leveraged and invest less in physical and intangible capital. Their performance deteriorates several years before zombification and remains poor in subsequent years. 25% of zombie companies exited the market (died), while 60% formally recovered from zombie status. However, recovered zombies underperform compared to firms that have never been zombies and they face a high probability of relapsing into zombie status.

Abstract

Using firm-level data on listed non-financial companies in 14 advanced economies, we document a rise in the share of zombie firms, defined as unprofitable firms with low stock market valuation, from 4% in the late 1980s to 15% in 2017. These zombie firms are smaller, less productive, more leveraged and invest less in physical and intangible capital. Their performance deteriorates several years before zombification and remains significantly poorer than that of non-zombie firms in subsequent years. Over time, some 25% of zombie companies exited the market, while 60% exited from zombie status. However, recovered zombies underperform compared to firms that have never been zombies and they face a high probability of relapsing into zombie status.

JEL codes: D22, D24, E43, G33

Keywords: zombie companies, firm behaviour, economic dynamism, productivity growth, bankruptcy