The Role of Different Types of Creditors on Zombie Firm Creation

Abstract

Despite the key role of trade creditors as sources of finance, the literature on their impact on the proliferation of zombie firms is rare. This study examines whether suppliers, such as banks, engage in “evergreen” lending to zombie firms and whether their behavior differs from that of banks. We found that highly productive, larger and younger firms are less likely to become zombie firms. The behavior of suppliers is, in fact, different from that of banks; they are indeed more cautious in lending to zombie firms. Unlike suppliers, banks seem to have contributed to the rise of resource misallocation, a key explanation for the productivity slowdown in the new century.