Zombie companies and the implementation of support measures during Covid-19

The Covid-19 pandemic has triggered the sharpest economic contraction since World War II and prompted governments to adopt unprecedented support measures. Businesses, in particular, have benefited from a wide range of programs, from equity transfers and injections to state-guaranteed loans and debt moratoriums. There is evidence that these economic measures have helped to prevent a significant increase in bankruptcies and business closures – the number of businesses that went bankrupt or left the market after the pandemic is significantly lower than in previous years ( Banerjee et al 2021, Djankov et al 2021, Orlando and Rodano 2022).1

A major concern is the extent to which these measures ended up also benefiting unviable but still active firms (“zombie firms”), thus altering the process of firm selection and reallocation of resources (Leaven et al. 2020 , Barnes et al. 2021 , Demmou and Franco 2021). In a recent article (Pelosi et al. 2022), we assess this concern empirically, studying the adoption by zombie firms of the most relevant support measures adopted in Italy. Because the policies are similar to those adopted in other large advanced countries, we argue that our exercise has a reasonable degree of external validity.

In our analysis, we focus on three main measures adopted between March and May 2020: “subsidies (i.e. transfers granted to eligible companies), debt moratoriums and public guarantee loan programs “. These measures are significant – by March 2021 (the end of our sample period), businesses had received almost €7 billion in transfers, around €150 billion in loans had been placed under moratoria and banks had issued around 150 billion euros in state-guaranteed loans. loans.

Our study draws on granular administrative microdata on corporate balance sheets and data on their use of Bank of Italy support measures. These data allow us (1) to identify zombie firms based on pre-crisis balance sheet data and commonly adopted criteria, and (2) to study the allocation of Covid-19 support measures by status. business, while taking into account the differential impact of the pandemic across business size, industries and provinces.

The literature uses two main definitions of zombie firms. The first relies on the interest coverage ratio, which measures whether companies’ operating profits can cover interest expenses (Adalet McGowan et al. 2018; Banerjee and Hoffman 2018, Andrews and Petroulakis 2019). The second is based on obtaining subsidized loans (Caballero et al. 2008, Acharya et al. 2019). We find that the first definition is more successful in classifying zombie firms with lower productivity, low liquidity and capitalization, and higher probability of default (Z-score) than the subsidized credit-based definition. Moreover, the definition based on the interest coverage ratio has the desirable property of identifying borrowers whose loans are more likely to be non-performing (NPL). Thus, throughout the analysis, we rely on the definition of zombie firms based on firm profitability.

Using this definition, we find that at the end of 2019, zombie firms represented approximately 3% of all firms (11% as asset share, 5.5% value added), and their incidence was higher in industries that experienced a larger drop in revenue in 2020 (Figure 1). Interestingly, these figures are of the same order as those obtained by Favara et al. (2021) for the United States.

Figure 1 Impact of zombies

a) Share by indicator

b) Incidence of zombies and growth in sales

Source: Authors’ calculations based on data from CERVED and the Italian Ministry of Economy and Finance.

Our main finding is that zombie firms are less likely than healthy firms to access public support measures (Figure 2). Specifically, they were 8.7% less likely to get a grant and 1.8% less likely to put their debt in moratorium. Additionally, they were 14% less likely to receive government-backed loans, and those that did received loans that were on average 58% lower than those given to healthy businesses. Finally, when accessing a secured loan, it was 12% more likely to be fully secured.2

Figure 2 Support Measure Zombies Takeover

Source: Our calculations on data from CERVED, Anacredit, Tesoreria telematica, Mediocredito centrale and SACE.

As far as subsidies are concerned, the lower participation of zombie companies depends on the design of the measure. Companies were eligible for the grants if their revenues fell by at least a third between April 2019 and April 2020. Due to their structurally low level of revenues, zombie companies were less likely to suffer a loss of such magnitude during the pandemic. In fact, controlling for revenue growth between 2018 and 2019, we find that grant usage is similar for companies that had strong revenue growth in 2019 but were still zombies.

Understanding why zombie firms were less likely to access debt moratoriums and secured loans is less straightforward. We show that the low use of moratoriums by zombie firms depends on whether or not they obtain a guaranteed loan. Zombie firms that did not receive a secured loan were more likely than healthy firms to use the moratorium. This finding suggests that the zombie firms viewed the two measures as substitutes.

Finally, zombie companies received fewer guaranteed loans than healthy companies. However, provided they access a loan, zombies are more likely to receive full collateral. While zombies may have lower credit demand, their incentives to access cheap loans to replace existing loans are plausibly high. As for the banks, the incentives are mixed. On the one hand, banks may prefer to replace their existing zombie loans with secured loans and transfer the credit risk to the government. On the other hand, banks earn less interest on secured loans, and substituting existing loans with secured credits would reduce unit margins. Since the interest rate differential is likely to be higher for riskier firms than for safer firms, this channel would induce banks to make fewer guaranteed loans to zombie firms.3 In addition, banks could still be held liable for “reckless lending” if a borrower who originally appeared too weak defaults. This would probably encourage banks to lend relatively less to zombie firms than to healthy firms.

We must recognize two caveats when reading our results. The first is that other measures, such as partial unemployment programs or the freezing of bankruptcy proceedings, have also helped to keep businesses alive. Second, businesses that were classified as zombies before the pandemic may not be in the post-Covid world and vice versa. However, it is reasonable to think that companies characterized by lower productivity and profitability and a higher probability of default before the Covid shock – i.e. those that we identify as zombies – are likely to suffer. also be non-viable after the shock.

Overall, our data suggests that zombie firms were less likely than healthy firms to accept subsidies, loan moratoriums, and government loan guarantees, suggesting that these measures did not contribute to a zombification of the economy. These results are consistent with those available for France (Cros et al. 2021).


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1 Part of the reduction in bankruptcy proceedings is due to the freezing of new active filings until July 2020. However, new bankruptcy proceedings are below pre-pandemic levels, even in the second half of 2020 and in 2021 ( Orlando and Rodano 2022).

2 Loans below €30,000 were eligible for a 100% guarantee.

3 See Cascarino et al. (2022) for evidence consistent with this hypothesis.

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