A zombie company is a business that has been unable to generate enough profit to cover its debt-servicing costs for an extended period. It survives only because lenders keep extending its loans.
The Bank for International Settlements (BIS) recently analyzed how many of these zombies exist in the developed world. Using data on 32,000 listed firms across 14 developed nations, the BIS study shows that the frequency of zombie companies has steadily risen since the late 1980s.
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The rise in zombie shares did not follow a smooth path; instead, it jumped after recessions in the early 1990s, early 2000s, and the 2008 financial crisis, with only partial reversals during expansions.
The BIS analysis points to reduced financial pressure as a key cause. Lower interest rates, which have ratcheted down since the mid-1980s, make it cheaper for banks to roll over loans to struggling firms instead of forcing them to restructure or exit. According to the research, even after controlling for other variables, lower interest rates are associated with higher zombie shares.
Economists Caballero and colleagues first introduced the concept of zombie firms in 2008 while studying Japan's economic stagnation, noting that lenders often propped up failing businesses to sidestep acknowledging bad debts. This historical precedent is a cautionary tale for today's policymakers: prolonged easy money can trap resources in unproductive firms, potentially triggering a long period of sluggish growth similar to Japan's experience.
The BIS study confirms that zombie firms are less productive than non-zombies. Their presence also lowers investment and employment at more productive firms. However, the study finds evidence of this crowding-out effect only when using the narrow zombie measure that accounts for expected future profitability - suggesting it is important to consider future profit expectations, not just current profitability, when classifying zombies.
When the share of zombies in an economy rises, aggregate productivity growth slows. The BIS analysis demonstrates that zombies drag down economic performance due to their own low productivity and their harmful effect on investment and hiring at healthier firms.
The Japanese experience serves as a stark reminder of the long-term damage. For over a decade, the country's economy stagnated as zombie firms consumed capital and labor that could have been deployed more efficiently. The BIS warns that similar dynamics could unfold if central banks maintain accommodative policies for too long, especially after the pandemic-era support measures. This pattern underscores how cheap credit, while helpful in crises, can inadvertently preserve inefficient businesses and hinder the broader recovery.
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