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Paper Spotlight: Identifying the Real Effects of Zombie Lending

Fabiano Schivardi
Enrico Sette
Guido Tabellini

 

 

 

 

 

 

 

The impact of COVID-19 has driven many firms into financial distress, and policymakers around the world have responded with various emergency measures to support the business sector. While the immediate priority has been to get support out quickly to firms, over time more active decisions will have to be made on which firms should be supported. A potential danger that arises is that firms that should be allowed to shut down are kept alive as “zombie firms” through the provision of subsidized financing. The literature has found that diverting resources to zombie firms has a negative effect on healthy firms in the same industry. However, in the paper “Identifying the Real Effects of Zombie Lending,” Fabiano Schivardi, Enrico Sette, and Guido Tabellini argue that the literature may suffer from a serious identification problem. Often implicitly, and sometimes explicitly, firm performance is used to identify zombie firms. This is problematic, because a downturn in an industry may be associated with both declining performance of healthy firms and a narrowing of the performance gap between healthy and weak firms. There will therefore be a bias toward finding that healthy firms too suffer in a sector with a high proportion of zombie firms. In analyzing the effects of COVID-19, determining the extent to which zombie financing is a problem will be an important issue both for policymakers and for researchers.

Spotlight by Uday Rajan
Photos courtesy of Fabiano Schivardi, Enrico Sette, and Guido Tabellini
First published July 17, 2020