Macrofinancial spillovers from zombie firms
In this paper, Albuquerque and Iyer analyze the macrofinancial spillovers from zombies to nonzombies operating in the same industry and country and investigate how higher banks’ capital buffers can alleviate these negative spillover effects. The authors construct a dataset on nonfinancial zombie firms worldwide since 1997 for private firms and since 2000 for listed firms. Using firm-level data from S&P Compustat and Bureau van Dijk ORBIS over the last two decades, they define zombie firms as firms that are likely both in financial distress and unprofitable. Albuquerque and Iyer then track the evolution of several balance sheet indicators before and after a firm is classified as zombie in order to shed more light on what makes a firm become a zombie firm, and how they typically evolve afterward. Some of their findings include:
- The share of zombie firms has been increasing worldwide, particularly since the Global Financial Crisis (GFC) and the COVID-19 pandemic.
- Contrary to expectations, the incidence of zombification is lower among private firms compared to listed firms, which may be explained by the lower average survival rates of private firms.
- Zombie firms have significant negative macrofinancial spillovers, as they reduce the financial performance of non-zombie firms within the same industry. In particular, non zombies in industries with a greater number of zombie firms tend to experience lower TFP, investment, employment growth, and reduced credit supply.
- Countries with stronger banks and tighter macroprudential policies tend to have fewer zombie firms and more robust non-zombie firms.
We find these congestion effects to be quite persistent, indicating that zombie firms may cast a long shadow on the economy. To mitigate these negative spillover effects, we find that countries with higher regulatory capital buffers or lower NPLs, tighter macroprudential policies, or policies that minimize banks window-dressing their balance sheets, are typically associated with lower zombie shares and with stronger nonzombies. Improving the banking sector may, however, not be sufficient if insolvency frameworks are not well-prepared to deal with the restructuring or insolvency of firms.
The Rise of the Walking Dead: Zombie Firms Around the World
Authors: Bruno Albuquerque, Roshan Iyer
From: IMF
Macroprudential tools and zombie firms
In this paper, Gasparini et al. take the argument of Albuquerque and Iyer above one step further by arguing that while high capital requirements can mitigate the negative spillover effects of zombie firms, they may not be sufficient to mitigate the adverse effects of firm risk shocks on the economy. Implementing a countercyclical capital buffer, in addition to high capital requirements, can effectively stabilize the economy by allowing firms access to financial resources during downturns without increasing bank defaults.
- For the empirical part of the paper, the authors use time series regression techniques to show that an increase in firm risk leads to a significant fall in output and inflation in the US over the sample from January 2005 to June 2020. Moreover, bank risk rises significantly, which indicates that firm risk carries over to the banking sector in the form of a higher implicit bank default probability.
- To model the transmission of these risk shocks, the authors use a model that combines New Keynesian price-setting frictions with financial market imperfections. This model framework highlights how an increase in firm default risk can lead to significant macroeconomic outcomes, including a fall in output and inflation, as well as an increase in bank risk, which is indicated by a higher implicit bank default probability.
In a business cycle model featuring leveraged firms and banks, we show that high minimum capital requirements are effective in reducing bank failures. This default risk channel supports credit and investment. A drawback of high capital requirements, however, is that they decrease banks’ capacity to provide credit to firms. This bank equity channel has a negative effect on credit and investment. The implementation of a countercyclical capital buffer (CCyB) can help reduce the contraction in lending through the bank equity channel, but it does so at the cost of increasing bank defaults. The main takeaway from our analysis is that the joint implementation of a high capital requirement and a CCyB is effective for macroeconomic stabilization.
Risky firms and fragile banks: implications for macroprudential policy
Authors: Tommaso Gasparini, Vivien Lewis, Stéphane Moyen, Stefania Villa
From: Banque de France, Deutsche Bundesbank, Bank of Italy
