Research

Dead Firms Walking: Financial Distress, Zombies, and Monetary Policy Transmission, Latest Version

Two firms can appear equally weak on any single standard balance-sheet metric yet respond in opposite directions to the same monetary policy shock. This paper argues that the relevant heterogeneity for monetary transmission lies not between constrained and unconstrained firms, but within the set of financially weak firms. Using a multi-dimensional indicator of financial viability, I distinguish healthy, distressed, and zombie firms - groups that appear similar on individual metrics but differ systematically on the composite. While zombie firms are financially weaker than healthy and distressed firms, bank evergreening shields their loans from interest rate changes. Using ORBIS balance-sheet data for 5 million firms across 20 Euro Area countries from 2005 to 2022 and panel local projections, I find that zombie firms’ investment responds less to monetary surprises than that of healthy and distressed firms. This divergence is driven by interest rate hikes rather than cuts, and is more pronounced in countries with weaker bank sectors. A one percentage point higher zombie share further dampens this response by approximately one percentage point, suggesting a near-proportional drag on monetary policy transmission.

Fear the Walking Dead? Zombie Firms in the Euro Area and their Effect on Healthy Firms’ Credit Conditions

with Kristian Horn, ESRB Working Paper, SUERF Summary, Financial Times Article

Zombie firms may adversely impact healthy firms through several transmission channels. Besides real spillover effects on productivity or investment, zombies may also cause negative financial spillover effects, where zombies receive credit at more favourable conditions than healthy firms. We investigate characteristics of zombie firms in the euro area and whether they cause spillovers on healthy firms’ credit conditions, focusing on two variables: new credit and interest rates. Contrary to existing findings, our results indicate that zombie firms pay higher interest rates and receive less new credit than healthy firms. The spillover effect of zombie firms on healthy firms’ new credit is not significant. For interest rates, the spillover effect is even reversed: Zombie existence significantly lowers healthy firms’ interest rates. Zombie firms across the euro area are smaller, less profitable, and more leveraged with lower credit quality than healthy firms. Yet, they do not seem to pose significant negative externalities on the credit conditions of healthy firms. Novel loan-by-loan data from the European credit registry (AnaCredit) allows our analysis to be over a broad set of countries and firms, on a new level of granularity. This may explain the divergence of our findings from the existing literature.

Adapting to Brexit: the Response of Corporate Structures to Geopolitical Uncertainty, CEPR Discussion Paper No. 21312

with Meredith Crowley (Cambridge, CEPR), Mar Domenech-Palacios (ECB), Elisa Faraglia (Cambridge, CEPR), Chryssi Giannitsarou (Cambridge, CEPR)

Geopolitical uncertainty alters the incentives of firms to organise their corporate structure across borders, creating a distinct margin of adjustment in response to policy risk. We study this margin using the Brexit referendum as a quasi-natural experiment. We combine firm level data on parent-subsidiary links for UK and EU firms between 2011 and 2021 with measures of Brexit-related uncertainty and study changes in foreign subsidiary formation at the extensive margin. Following the referendum, there was an increase in the number of subsidiary formation from the UK into the EU, while the number of EU firms that expanded with subsidiaries into the UK dropped. UK firms establishing their first EU subsidiary after the referendum were systematically weaker ex ante than comparable firms that did so before the referendum. Increased Brexit-related uncertainty is associated with increased foreign subsidiary formation from the UK into the EU, driven primarily by small firms, alongside suggestive evidence of decreased domestic subsidiary incorporation by UK firms. We interpret these findings as evidence of a 'precautionary' foreign direct investment channel, operating through changes in the corporate structures of firms in response to geopolitical uncertainty. 

How Do CEOs Think the Economy Works? Evidence from Monetary Policy Expectations 

with Nicholas Bloom (Stanford University), Philip Bunn (BoE), Paul Mizen (King's College London), Gregory Thwaites (University of Nottingham) and Ivan Yotzov (BoE), using DMP firm-level survey data.

Are European Firms Financially Constrained?

with Luis Brandao Marques (IMF), Alexandra Fotiou (IMF), Richard Varghese (IMF). Featured in Staff Discussion Note joint with IMF Research Department.