A hidden channel of “blood transfusion”: Internal capital market subsidies and zombie firms

Xinyu Li, Huacheng Wang and Rong Li

The British Accounting Review, 2023, vol. 55, issue 6

Abstract: From the perspective of internal capital markets, we investigate the causes of zombie firms and propose possible governance measures. Based on Chinese A-share listed firms, we find that internal capital market subsidies promote the zombification of firms. This impact is stronger when the liquidity of the external capital market is higher or when there is a finance firm in the internal capital market. Additionally, there is a “pecking order” of the subsidies that contribute to the zombification of firms: government subsidies take the lead, followed by internal capital market subsidies, and then bank loans. The motivations for internal capital markets to subsidize zombie firms include avoiding risk contagion, avoiding losing control rights, being socially responsible, and maintaining rent-seeking opportunities for managers. The sources of internal capital market subsidies are mainly parent firms and brother firms. Constraining agency problems and engaging in related major asset restructuring play important role in the governance of zombie firms. Overall, our study reveals internal capital markets to be a “blood transfusion” channel and it provides guidance for tackling the problem of zombie firms.

Keywords: Internal capital market subsidies; Zombie firms; Pecking order; Motivations for subsidies; Governance measures (search for similar items in EconPapers)
JEL-codes: G32 G34 G39 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:bracre:v:55:y:2023:i:6:s0890838923001245

DOI: 10.1016/j.bar.2023.101267

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