Loan Recoveries and the Financing of Zombie Firms over the Business Cycle

Asli Demirguc-Kunt, Bálint Horváth and Harry Huizinga
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Bálint Horváth: University of Arizona

No 654, Working Papers from Center for Global Development

Abstract: Using new data from the European Banking Authority on loan recovery outcomes, we examine how variation in loan recovery efficiency affects the transmission of financial sector and overall economic weakness to firm-level financial and real outcomes. We find that firms linked to under-capitalized banks experience higher debt, employment, and sales growth rates, if they are located in countries with less efficient loan recoveries. Furthermore, during economic downturns zombie firms—insolvent firms that continue to receive credit—achieve higher debt, employment, and sales growth, and fewer defaults if they are resident in such countries. Overall, we find that less efficient loan enforcement mitigates the transmission of financial sector and economic weakness to firm-level outcomes. This stabilizing effect, however, is likely to come at the cost of significant distortions documented in earlier literature.

Keywords: loan recovery; zombie firm; business cycle (search for similar items in EconPapers)
JEL-codes: E32 G21 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2023-09-22
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cfn and nep-eec
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Related works:
Working Paper: Loan recoveries and the financing of zombie firms over the business cycle (2023)
Working Paper: Loan Recoveries and the Financing of Zombie Firms over the Business Cycle (2023)
Working Paper: Loan Recoveries and the Financing of Zombie Firms over the Business Cycle (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:cgd:wpaper:654

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