DP16685 Zombie Lending: Theoretical, International, and Historical Perspectives

Author(s): Viral V. Acharya, Matteo Crosignani, Tim Eisert, Sascha Steffen
Publication Date: November 2021
Date Revised: March 2022
Keyword(s): bank capital, capital misallocation, Credit misallocation, interst rate subsidy, Spillovers, undercapitalized banks, zombie credit
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16685

This paper surveys the theory on zombie lending incentives and the consequences of zombie lending for the real economy. It also offers a historical perspective by reviewing the growing empirical evidence on zombie lending along three dimensions: (i) the role of under-capitalized banks, (ii) effects on zombie firms, and (iii) spillovers and distortions for non-zombie firms. We then provide an overview of how zombie lending can be attenuated. Finally, we use a sample of U.S. publicly listed firms to compare various measures proposed in the literature to classify firms as ``zombies." We identify definitions of zombie firms that are adequate to investigate economic inefficiency in the form of real sector competitive distortions of zombie lending. We find that only definitions that are based on interest rate subsidies are able to detect these spillovers and thereby provide evidence in support of credit misallocation.