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Credit Market Tightness and Zombie Firms: Theory and Evidence

Author

Listed:
  • Masashige Hamano

    (Waseda University)

  • Philip Schnattinger

    (Bank of England)

  • Mototsugu Shintani

    (University of Tokyo)

  • Iichiro Uesugi

    (Hitotsubashi University)

  • Francesco Zanetti

    (University of Oxford
    Centre for Economic Policy Research (CEPR))

Abstract

We develop a simple model of financial intermediation with search and matching frictions between banks and firms. The model links credit market tightness encapsulating the abundance of credit to the search and opportunity costs of credit intermediation. Search costs generate lending to unprofitable firms (i.e., zombies) and the opportunity costs of searching exert countervailing forces on the incentives for banks and firms to participate in zombie lending, generating an inverted U-shaped relationship between credit market tightness and the share of zombie lending. High bargaining power of firms decreases the opportunity cost of firms foregoing credit relationships, reduces the share of zombie firms and increases the efficacy of capital injections to reduce zombie lending. Using data for 31 industries in Japan over the period 2000-2019, we test and corroborate our theoretical predictions by constructing theory-consistent measures of credit market tightness and bargaining power. Consistent with our theory, the findings reveal that capital injections are more effective in industries with higher credit market tightness and greater bargaining power of firms.

Suggested Citation

  • Masashige Hamano & Philip Schnattinger & Mototsugu Shintani & Iichiro Uesugi & Francesco Zanetti, 2025. "Credit Market Tightness and Zombie Firms: Theory and Evidence," Discussion Papers 2504, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2504
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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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