A Theory of Zombie Lending

Using a pan-European, firm-bank matched data set, we find weak evidence of investment misallocation in Europe. Firms with higher debt overhangs invest significantly less, in particular in sectors that are facing good global growth opportunities. We also find that firms with higher debt overhangs are more likely to invest if they borrow from undercapitalized banks, and this effect is particularly strong in industries facing good global growth opportunities, suggesting a misallocation of investment associated with ‘zombie lending’. Our results are consistent with theories of investment misallocation due to agency problems at firms and at banks.

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Zombie Lending and Depressed Restructuring in Japan

The American Economic Review ◽

10.1257/aer.98.5.1943 ◽

2008 ◽

Vol 98 (5) ◽

pp. 1943-1977 ◽

Cited By ~ 440

Author(s):

Ricardo J Caballero ◽

Takeo Hoshi ◽

Anil K Kashyap

Keyword(s):

Market Share ◽

Employment Growth ◽

Job Creation ◽

Firm Level ◽

Competitive Process ◽

Lower Productivity ◽

Zombie Lending ◽

Job Creation And Destruction ◽

Productivity Gap

Large Japanese banks often engaged in sham loan restructurings that kept credit flowing to otherwise insolvent borrowers (which we call zombies). We examine the implications of suppressing the normal competitive process whereby the zombies would shed workers and lose market share. The congestion created by the zombies reduces the profits for healthy firms, which discourages their entry and investment. We confirm that zombie-dominated industries exhibit more depressed job creation and destruction, and lower productivity. We present firm-level regressions showing that the increase in zombies depressed the investment and employment growth of non-zombies and widened the productivity gap between zombies and non-zombies. (JEL G21, G32, L25)

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Zombie Lending and Policy Traps

SSRN Electronic Journal ◽

10.2139/ssrn.3936064 ◽

2021 ◽

Author(s):

Viral V. Acharya ◽

Simone Lenzu ◽

Olivier Wang

Keyword(s):

Zombie Lending

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Bank Specialization and Zombie Lending

SSRN Electronic Journal ◽

10.2139/ssrn.3923576 ◽

2021 ◽

Author(s):

Olivier De Jonghe ◽

Klaas Mulier ◽

Ilia Samarin

Keyword(s):

Zombie Lending

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Distressed firms, zombie firms and zombie lending: a taxonomy

SSRN Electronic Journal ◽

10.2139/ssrn.3949415 ◽

2021 ◽

Author(s):

Laura Álvarez Román ◽

Miguel Garcia-Posada ◽

Sergio Mayordomo

Keyword(s):

Distressed Firms ◽

Zombie Lending

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Zombie Lending and Depressed Restructuring in Japan

10.3386/w12129 ◽

2006 ◽

Cited By ~ 57

Author(s):

Ricardo Caballero ◽

Takeo Hoshi ◽

Anil Kashyap

Keyword(s):

Zombie Lending

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Bank Cleanups, Capitalization, and Lending: Evidence from India

Review of Financial Studies ◽

10.1093/rfs/hhaa119 ◽

2020 ◽

Cited By ~ 1

Author(s):

Yakshup Chopra ◽

Krishnamurthy Subramanian ◽

Prasanna L Tantri

Keyword(s):

Information Asymmetry ◽

Risk Shifting ◽

Real Economy ◽

Economic Stability ◽

The Real ◽

Quality Review ◽

Shadow Banks ◽

Zombie Lending ◽

Asset Quality ◽

The Impact

Abstract We examine the Indian bank asset quality review, which doubled the declared loan delinquency rate. Relative economic stability during the exercise and the absence of a capital backstop together make it unique. We find that the expected reduction in information asymmetry does not automatically lead to the recapitalization of banks by markets. The consequent undercapitalization leads to underinvestment and risk-shifting through zombie lending. The impact flows to the real economy through borrowers, including shadow banks, and adversely impacts growth. These findings show that bank cleanup exercises not accompanied by policies aimed at recapitalization may be insufficient even during normal times.

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