Zombie Lending: Theoretical, International, and Historical Perspectives

Abstract

This article surveys the theory on zombie lending incentives and the consequences of zombie lending for the real economy. It also offers a historical perspective by reviewing the growing empirical evidence on zombie lending along three dimensions: ( a) the role of undercapitalized banks, ( b) effects on zombie firms, and ( c) spillovers and distortions for non-zombie firms. We then provide an overview of how zombie lending can be attenuated. Finally, we use a sample of US publicly listed firms to compare various measures proposed in the literature to classify firms as “zombies.” We identify definitions of zombie firms that are adequate to investigate economic inefficiency in the form of real sector competitive distortions of zombie lending. We find that only definitions based on interest rate subsidies are able to detect these spillovers and thereby provide evidence in support of credit misallocation.