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.
Between Distress and Zombification: Understanding Firm Financial Viability for Monetary Policy Transmission
Amidst the unprecedented rise of interest rates, questions around the efficiency of the transmission of monetary policy have regained prominence. I study the role of monetary policy shocks on firms’ balance sheets, accounting for degrees of financial viability. To this end, I construct a multi-dimensional indicator of financial viability, grouping firms into healthy, distressed and zombie firms based on their balance sheet characteristics. I then estimate the sensitivity of these firm types to monetary surprises. The reaction of zombie firms to a rise in interest rates is theoretically ambiguous: They are more financially constrained than healthy and distressed firms, but bank evergreening might shield their loans from interest rate changes. Using panel data local projections, I find evidence for the latter channel. Zombie firms' investment is less sensitive to monetary surprises than that of healthy and distressed firms. This effect is more pronounced for interest rate hikes than cuts, consistent with loan evergreening. This result is robust to several alternative specifications, investment measures, firm group definitions and monetary shock series. The existence of zombie firms in the Euro Area economy might thus potentially impede effective monetary policy transmission.
Photo: King's College, Cambridge.