Zombie Lending Due To The Fear Of Fire Sales

Kaushalendra Kishore, Nirupama Kulkarni and Saurabh Roy
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Kaushalendra Kishore: Centre for Advanced Financial Research and Learning (CAFRAL)

Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL)

Abstract: This paper documents a new externality stemming from the fear of fire sales: increased zombie lending during real estate price downturns. Firms use pledgeable assets such as real estate collateral to borrow. Using firm and syndicated loan data in the US, we confirm that the sensitivity of firms’ debt to real estate collateral is positive. However, this sensitivity falls during real estate price declines due to an increase in lending to low-quality firms despite a fall in real estate collateral value. Zombie credit to high collateral firms increases as lenders internalize the price externalities of liquidating real estate collateral. Zombie presence depresses investment and profitability of healthier firms. Our paper highlights a new mechanism for zombie lending resulting from reduced collateral liquidation in markets prone to fire sales.

Keywords: Zombie; Bankruptcy; Banking Regulation; India; Creative Destruction (search for similar items in EconPapers)
JEL-codes: F34 G23 G28 G33 K42 O53 (search for similar items in EconPapers)
Pages: 62
Date: 2021-03
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Journal Article: Zombie lending due to the fear of fire sales (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:cafral:022293

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