Zombie Firms, Corporate Restructuring and Relationship Banking: Credit Guidance as a Key to Tackle Zombie Lending?

Fischer Felix Bernhard ()
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Fischer Felix Bernhard: Chair of Business Administration and Accounting, Ingolstadt School of Management, Catholic University of Eichstätt-Ingolstadt, Auf der Schanz 49, 85049 Ingolstadt, Bavaria, Germany

Accounting, Economics, and Law: A Convivium, 2025, vol. 15, issue 3, 395-435

Abstract: Economists have examined the rise of so-called zombie firms in recent years. Such firms remain in financial distress for a prolonged period while financial creditors keep them alive through continued lending. Based on signaling theory, we investigate zombie firms in the context of corporate restructuring and relationship banking. Combining a theoretical approach with a multiple case study on German medium-sized firms facing private workouts, we derive the following main propositions: (i) Banks face information asymmetry and may have incentives for loan extension (i.e., rescheduled installments and additional collateral) when deciding about restructuring financing. In the case of financing unviable restructuring strategies, this can lead to the emergence of zombie firms. (ii) For this reason and in contrast to recent research, not only weakly capitalized but also healthy banks may face such incentives and might end up in financing zombie firms. (iii) Relationship banking reduces bank information asymmetry. Thus, it may enable banks to detect clients’ distress situations in the early stages and to support resolving them. Hence, guiding and inspecting banks (i.e., credit guidance) to carry out supportive relationship banking might be a key to preventing the emergence of zombie firms. The propositions bear several implications relevant to academic research, bank management and banking regulation.

Keywords: banking regulation; collateral; corporate restructuring; relationship banking; zombie firms (search for similar items in EconPapers)
JEL-codes: G28 G33 G34 L21 L22 L25 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1515/ael-2020-0065

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