An autopsy of zombie firms reveals growing and recovering companies

Zombie-labelled firms are often not truly distressed but rather growing companies with temporarily weak performance, write Satu Nurmi, Juuso Vanhala and Matti Virén

Economic policies practised after the financial crisis are alleged to have led to a rise in the incidence of zombie-firms. Zombies refer to weakly performing firms that are unable to cover their debt servicing costs from current profits over an extended period. The persistent survival of these poorly performing zombies are considered to be a drag on the economy, as they congest markets for healthy firms and dampen productivity growth. The usual suspects behind the rise of zombies are low interest rates, evergreening (subsidised credit), and government subsidies to firms, all considered to provide these distressed firms with life-support.

In Nurmi, Vanhala and Virén (2020) we perform an ‘autopsy’ of zombies and show that the fear for zombies may be largely unfounded. A closer look into firm-level data from Finland reveals a striking finding: one third of these allegedly distressed firms are in fact growing companies and two thirds recover from zombie status to become healthy firms again. Zombie-labelled firms (commonly defined as firms having an interest coverage ratio less than one for three consecutive years) are thus often not truly distressed firms but rather growing companies with temporarily weak performance measures. For policy recommendations, the true nature of firms labelled as zombies is important: providing life support (e.g. subsidies or low interest rates) to death-ripe firms is harder to justify than supporting temporarily unprofitable but recovering firms.

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