Is zombie credit disinflationary?
In this paper Acharya et al. identify a zombie credit channel that can explain the concurrence of the rise of zombie credit and the disinflationary pressure evidenced in Europe after the global financial crisis. They show, in a simple model, that by keeping impaired firms alive that would otherwise default, zombie credit hampers the adjustment in the aggregate production capacity that usually follows a negative demand shock. The resulting excess capacity puts downward pressure on firms’ markups and product prices. In equilibrium, zombie credit causes a decrease in firm entry and exit rates, markups, and product prices, as well as a misallocation of capital and labor, which results in lower productivity, investment, and value added. They tested their theory using a new inflation and firm-level data set that covers 1.1 million firms in 12 European countries across 65 industries. They found that industries that experienced a stronger rise of zombie firms subsequently experienced lower product prices, lower firm markups, higher material and labor costs, higher aggregate sales, higher misallocation of capital and labor, as well as fewer firm defaults, lower productivity, lower labor productivity, lower net investment, and lower value added.
Zombie Credit and (Dis-)Inflation: Evidence from Europe
Authors: Viral V. Acharya, Matteo Crosignani, Tim Eisert, Christian Eufinger
From: Federal Reserve Bank of New York, New York University, Federal Reserve Bank of New York, IESE
Using machine learning to identify zombie firms
What are the determinants of zombie firms? Are zombie firms the same in Europe and in the US? These are the questions that De Martiis et al. are answering in this paper. They use a detailed and comprehensive set of publicly listed companies’ firm-level data from Compustat North America and Compustat Global. To this high dimensional dataset, which contains balance sheet, accounting, and fundamental variables, they apply a supervised learning method, namely the classification trees. They find that:
- US zombie firms differ from their European peers on a number of firm-specific and industry-specific factors;
- Income and leverage-related variables are among the main drivers classifying zombie companies in Europe, while dividends and stock-related variables are the predominant factors among US zombie firms populating the energy, real estate, and software industry;
- Zombie and distressed firms are often not comparable types of companies, rather firms at different stages of their financial unviability;
- Zombie firms are more prevalent in Europe, while distressed firms are more prevalent in the US.
Are you a Zombie? A Supervised Learning Method to Classify Unviable Firms and Identify the Determinants
Authors: Angela De Martiis, Thomas Heil, Franziska J. Peter
From: University of Bern, Zeppelin Universität
