Zombie Lending to U.S. Firms

We provide the first empirical evidence that zombie firms---highly levered firms with weak growth prospects---are not a prominent feature of the U.S. economy and that U.S. banks do not lend to such firms. Using confidential supervisory data on firm-bank relationships during the 2014--2019 period, we estimate that zombie firms are few in number and operate predominantly in declining industries. Banks---including the weakly capitalized ones---reduce their exposure to firms that transition into zombie status, charge zombie firms higher loan rates, and assess these firms as having higher default probability. Likely as a result, zombie firms exit the market through bankruptcy at a faster rate than other firms. To sharpen the causal interpretation of our findings, we exploit the sudden and sizeable drop in global oil prices in 2014--2015 as a natural experiment to identify levered firms that transition into zombie status and banks that suffer loan losses on their balance sheets. In contrast to existing findings for other countries, our evidence suggests that in the United States bank lending is not a key driver of zombie firms' proliferation and survival