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When companies don't die: Analyzing zombie firms in a low interest rate environment

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  • Angela De Martiis
  • Franziska J. Peter

Abstract

We examine whether low interest rates foster non-viable firms in Europe by analyzing two classes of firms: zombies and distressed. Controlling for the business cycle and recession periods, we find a significantly negative effect of short-term rates on the likelihood of being a zombie, while no effect for distressed firms is detected. A decrease in inflation and a lower state of the business cycle is associated with a rise in both zombies and distressed firms. Examining a non- conventional monetary policy program, we find no evidence of credit misallocation. Therefore, concurring monetary and macroeconomic phenomena likely explain the presence of non-viable firms, although with dissimilarities between zombies and distressed firms.

Suggested Citation

  • Angela De Martiis & Franziska J. Peter, 2023. "When companies don't die: Analyzing zombie firms in a low interest rate environment," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 73(01), pages 67-86, December.
    • Handle: RePEc:usg:auswrt:2023:73:01:67-86
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    References listed on IDEAS

    as
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    5. Harjoat S. Bhamra & Christian Dorion & Alexandre Jeanneret & Michael Weber, 2018. "Low Inflation: High Default Risk AND High Equity Valuations," NBER Working Papers 25317, National Bureau of Economic Research, Inc.
    6. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
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    More about this item

    Keywords

    zombie firms; distressed firms; monetary policy; business cycle;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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