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Zombie Lending Due To The Fear Of Fire Sales

Author

Listed:
  • Kaushalendra Kishore

    (Centre for Advanced Financial Research and Learning (CAFRAL))

  • Nirupama Kulkarni

    (Centre for Advanced Financial Research and Learning (CAFRAL))

  • Saurabh Roy

    (University of Quebec at Montreal)

Abstract

This paper documents a new externality stemming from the fear of fire sales: increased zombie lending during real estate price downturns. Firms use pledgeable assets such as real estate collateral to borrow. Using firm and syndicated loan data in the US, we confirm that the sensitivity of firms’ debt to real estate collateral is positive. However, this sensitivity falls during real estate price declines due to an increase in lending to low-quality firms despite a fall in real estate collateral value. Zombie credit to high collateral firms increases as lenders internalize the price externalities of liquidating real estate collateral. Zombie presence depresses investment and profitability of healthier firms. Our paper highlights a new mechanism for zombie lending resulting from reduced collateral liquidation in markets prone to fire sales.

Suggested Citation

  • Kaushalendra Kishore & Nirupama Kulkarni & Saurabh Roy, 2021. "Zombie Lending Due To The Fear Of Fire Sales," Working Papers 022293, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:022293
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    File URL: https://www.cafral.org.in/sfControl/content/Speech/3112021121456AMFire_Sales_and_Zombie_Lending.pdf
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    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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