Bank Specialization and Zombie Lending

Author:

De Jonghe Olivier12ORCID,Mulier Klaas3ORCID,Samarin Ilia1

Affiliation:

1. Research Department, National Bank of Belgium, 1000 Brussels, Belgium;

2. Finance Department, Tilburg University, 5000LE Tilburg, Netherlands;

3. Department of Accounting, Corporate Finance and Taxation, Ghent University, 9000 Gent, Belgium

Abstract

We study whether banks internalize congestion externalities when lending to zombie firms. We conjecture that banks should be better informed about the presence of zombie firms and the congestion externalities that such firms exert on healthy borrowers in industries where banks are specialized and show that banks’ credit supply to zombie firms relates negatively to their industry specialization. This relation is stronger when congestion externalities are likely to have stronger adverse effects, namely when zombie firms take a higher fraction of resources in the industry or when the industry is geographically more concentrated. Additionally, this relation is weaker in industries with higher asset specificity as zombie firms’ default (and potential asset fire sales) could reduce healthy borrowers’ collateral value. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2023.01437 .

Publisher

Institute for Operations Research and the Management Sciences (INFORMS)

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