Judicial inefficiency and the default of zombie firms

Serena Fatica, Tommaso Oliviero () and Michela Rancan ()
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Michela Rancan: University of Milan

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: Using a large sample of European enterprises, we document that companies’ default probability is significantly larger when they experience negative end-of- the year equity (zombie status) in the year prior to default. Zombie firms are more likely to default in the short run in countries with more efficient judicial insolvency procedures. To establish a causal link between judicial efficiency and the default probability of zombie firms, we exploit a reform of the court districts in Italy that generates exogenous variation in trial lengths. This country-level analysis corroborates the findings of a cleansing effect of judicial efficiency that limits the persistence of zombie firms in the economy.

Keywords: default; zombie firms; SMEs; EU-27; judicial efficiency. (search for similar items in EconPapers)
JEL-codes: G33 K22 L25 O52 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-ent, nep-eur and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:747

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