Credit Market Tightness and Zombie Firms: Theory and Evidence

Masashige Hamano, Philip Schnattinger, Mototsugu Shintani, Iichiro Uesugi and Francesco Zanetti

No DP25-2, RCESR Discussion Paper Series from Research Center for Economic and Social Risks, Institute of Economic Research, Hitotsubashi University

Abstract: We develop a simple model of financial intermediation with search and matching frictions between banks and firms. The model links credit market tightness -encapsulating the abundance of credit- to the search and opportunity costs of credit intermediation. Search costs generate lending to unprofitable firms (i.e., zombies) and the opportunity costs of searching exert countervailing forces on the incentives for banks and firms to participate in zombie lending, generating an inverted U-shaped relationship between credit market tightness and the share of zombie lending. High bargaining power of firms decreases the opportunity cost of firms foregoing credit relationships, reduces the share of zombie firms and increases the efficacy of capital injections to reduce zombie lending. Using data for 31 industries in Japan over the period 2000-2019, we test and corroborate our theoretical predictions by constructing theory-consistent measures of credit market tightness and bargaining power. Consistent with our theory, the findings reveal that capital injections are more effective in industries with higher credit market tightness and greater bargaining power of firms.

Keywords: Zombie firms; bank lending; credit market tightness (search for similar items in EconPapers)
JEL-codes: E22 E23 E32 E44 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2025-01
New Economics Papers: this item is included in nep-fdg and nep-mac
Note: January 2025
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https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/84630/dp25-2_rcesr.pdf

Related works:
Working Paper: Credit Market Tightness and Zombie Firms: Theory and Evidence (2025)
Working Paper: Credit Market Tightness and Zombie Firms: Theory and Evidence (2025)
Working Paper: Credit Market Tightness and Zombie Firms: Theory and Evidence (2025)
Working Paper: Credit Market Tightness and Zombie Firms: Theory and Evidence (2025)
Working Paper: Credit Market Tightness and Zombie Firms: Theory and Evidence (2025)
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