Global Zombies

We propose a two-step filtering process using interest coverage ratio and default prediction models to measure the extent of “zombieism” globally: a phenomenon that describes the existence of companies that are insolvent but continue to survive due to unusual market conditions, financial institution, and the support of investors and government. We find that the average fraction of publicly traded zombie firms in the world's 20 largest economies increased significantly in the past 30 years but barely changed during the pandemic period in 2020 (at above 7%). We also find that financial market development, creditor rights, and debt enforcement efficiency help to explain cross-country variations in zombie ratios. Using staggered bankruptcy reforms in eight countries after 2000 as an exogenous variation to the modernization of the bankruptcy code, we find that the zombie ratio declines by an average of 1.3 percentage points after the reforms in those countries. Reforms strengthening creditor rights lead to a larger reduction in zombie ratios