Weak Corporate Insolvency Rules: The Missing Driver of Zombie Lending

Bo Becker and Victoria Ivashina

AEA Papers and Proceedings, 2022, vol. 112, 516-20

Abstract: "Zombie lending"—lending to less-productive firms at subsidized rates—can help banks with misaligned incentives in the short run, but it prolongs economic downturns. We propose that inefficient resolution of insolvency is a significant contributor to this problem. We exploit variation in the efficiency of insolvency across countries to show that lack of formal bankruptcies, cheap (zombie) credit, and stickiness of existing creditors is more common in bad economic periods when insolvency works less well.

JEL-codes: D22 E32 G21 G32 G33 G38 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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DOI: 10.1257/pandp.20221078

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