Zombie firms in Italy: a critical assessment

Giacomo Rodano and Enrico Sette

No 483, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This note shows the consequences of different methodological choices for the estimates of the incidence of zombie firms in Italy. We use as a benchmark the influential measure proposed by the OECD (Adalet McGowan et al. 2017a and 2017b) which identifies zombie firms based on a combination of firm age and values of the interest coverage ratio (operating profits to interest expenses). We show that a key decision is whether operating profits are taken before or after amortization and depreciation and we argue that using profits after amortization and depreciation has several undesirable characteristics: i) it overestimates the share of capital �trapped� into zombie firms, and, to a smaller extent, the share of zombie firms; ii) it is worse in predicting the future performance of firms; iii) it is more likely to classify as zombies in a given year firms which invested heavily in previous years and amortized that investment quickly (for example to enjoy tax breaks); iv) it is especially inappropriate for cross-country comparisons.

Keywords: zombie firms; productivity; misallocation (search for similar items in EconPapers)
JEL-codes: D24 L25 O47 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-bec, nep-eff, nep-eur and nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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