The Financing and Investment Crowding-out Effect of Zombie Firms on Non-zombie Firms: Evidence from China

Yiqiu Wang and Yunyi Zhu

Emerging Markets Finance and Trade, 2021, vol. 57, issue 7, 1959-1985

Abstract: Using a database on Chinese listed firms in 2006–2016, we identify Chinese zombie firms and the characteristics of their distribution by introducing the factors of government overprotection and bank credit support. We find that low-productivity zombie firms tie up abundant financial capital, and they have significant crowd-out effect on non-zombie firms. Furthermore, the crowding out of non-zombie firms by zombie firms are more severe among non-state-owned enterprises (non-SOEs), the manufacturing industries, the labor-intensive firms, and the regions with a high degree of marketization. Our study provides evidence that the prevalence of zombie firms exacerbates the misallocation of financial capital and market distortion and impedes the development of healthy industries.

Date: 2021
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DOI: 10.1080/1540496X.2019.1711370

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