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Zombie Origins: The History and Culture of the Living Dead

Zombie Dice is fun for any zombie fan (or the whole zombie family). The 13 custom dice are your victims. Push your luck to eat their brains, but stop before the shotgun blasts end your turn!


In this note, we present new facts about zombie firms in the United States that help inform this debate: we identify zombie firms and estimate the share of such firms among private and publicly listed firms; discuss their main characteristics; and examine their ability to tap credit markets before and after the onset of the pandemic.

Our main finding is that zombie firms are not a prominent feature of the U.S. economy. Among both private and publicly listed firms, zombie firms are few in number and generally small; they are mostly concentrated in the manufacturing and retail sectors and account for a small share of total credit to nonfinancial firms. Furthermore, the share of listed firms that we identify as zombies displays a cyclical pattern, rising in recessions and falling during expansions, likely reflecting a mix of aggregate and industry-specific shocks.

While these findings shed new light on the nature and importance of zombie firms in the U.S. economy, assessing whether the pandemic-driven recession and the unprecedented fiscal and monetary support that it triggered could lead to the proliferation of zombie firms remains an open question that can only be addressed as more data become available.

There is no formal definition of a zombie firm, but it is generally agreed that these firms are economically unviable and manage to survive by tapping banks and capital markets (Caballero, Hoshi, and Kashyap 2008). Accordingly, we identify zombie firms in U.S. data by requiring that they are highly leveraged and unprofitable.3 More precisely, we require that zombie firms have leverage above the sample annual median, interest coverage ratio (ICR) below one, and negative real sales growth over the preceding three years.4 High leverage and low ICR help identify firms that cannot cover their debt-servicing costs, while negative sales growth identifies firms with low growth prospects, as sales growth is a good predictor of firms' future performance.5

Note: This figure plots the share of publicly listed and private firms in zombie status during 2015-20. The share of private firms in zombie status for 2020 is missing because the latest available data on firms' financials in FR Y-14Q is 2019.

Looking back further in time, Figure 2 shows that for listed firms the share of zombies since 2000 was not much different than in recent years. Over the past 20 years, we estimate that this share has fluctuated within a narrow range and closely tracks business cycles and industry dynamics, such as the decline of the oil and gas sector starting in 2014.

Note: This figure plots the share of publicly listed firms (left panel) and the share of private firms (right panel) that are in zombie status according to alternative measures. The financial press measure considers firms that are mature and have ICRs below one to be zombies. The metric used by the academic literature adds to a low ICR requirement the condition that firms have high leverage and rely on cheap bank credit (that is, firms pay interest rates that are below those applied to the most creditworthy (AAA-, AA-, or A- rated) companies).

The estimates reported in Figure 3 show that our filters identify a lower share of zombie firms than are generally reported by the financial press and the academic literature, both for private and publicly listed firms. One likely explanation is that we require firms to not only have limited debt-servicing capacity, but also bleak growth prospects.8

A question of interest is whether zombie firms are widespread across industries or concentrated in a few declining sectors. Focusing on firms identified as zombies at the end of 2019, Figure 4 shows that while listed firms classified as zombies are highly concentrated in the manufacturing sector, zombies among private firms are over-represented relative to nonzombie firms in the retail trade sector, manufacturing and in the mining, oil, and gas industry.

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Note: This figure plots the industry distribution of publicly listed firms (left panel) and that of private firms (right panel) by zombie and nonzombie status at the end of 2019. The industry classification is based on two-digit NAICS classification. Sectors with shares of zombie firms lower than four percent are omitted.

Note: This figure focuses on credit ratings of firms with zombie and nonzombie status at the end of 2019. In the left panel, the credit ratings distribution is based on S&P ratings of publicly listed firms; in the right panel, the ratings distribution is based on banks' internal rating scores mapped to the S&P ratings scale.

How does the typical zombie firm compare with nonzombie firms along key balance sheet characteristics? Using data between 2015 and 2019, the entries in Table 1 suggest that among publicly listed firms (columns 1-2), those in zombie status are smaller in size, have lower return on assets, hold less cash and have lower investment opportunities (as reflected by a lower Tobin's q) than their nonzombie counterparts. For private firms, the average zombie firm is comparable in size, but is less profitable and holds less cash than other firms. With the exception of asset size for private firms, the p-values of equality of medians for zombie and nonzombie firms (columns 3 and 6) indicate that these differences are not only economically large but also statistically significant.

Note: This table reports sample medians of key firm characteristics for publicly listed firms (columns 1-2) and respectively private firms (columns 4-5) in zombie and nonzombie status during the 2015-19 period, with a p-value for nonparametric test of equality of medians across the two groups (columns 3 and 6). The samples are restricted to those firms with sufficient data to be classified as either zombie or nonzombie.

Figure 6 sheds light on another important question about zombie firms, namely the ability of these firms to stay in business despite their low profitability. The left panel of Figure 6 depicts the duration of zombie status, defined as the number of consecutive years that a firm had been in zombie status, given that it was classified as such in 2019. As shown, the zombie status of listed firms is not very persistent. Most zombie firms have been in this status for less than five years, with the maximum duration being eight years.

Note: This figure reports the distribution of zombie status duration for publicly listed firms in zombie status in 2019 (left panel), where duration is defined as the number of years that zombie firm has been in that status; and the bankruptcy rates for firms in zombie status and distressed firms in nonzombie status during 2015-19 (right panel), where distressed firms are in the top quartile of default probability based on the naïve version of the Merton distance-to-default model of Bharath and Shumway (2008).

We next evaluate zombie firms' ability to borrow in the bond and loan markets. As shown in Figure 7, the share of nonfinancial business credit to zombie firms is small: between 2015 and 2020, issuance of corporate bonds by zombie firms is less than five percent of total bond issuance (left panel) and bank credit exposure to zombie firms is below seven percent of total bank credit exposure (right panel).

Furthermore, in 2020, zombie firms accounted for an even smaller share of the total bonds issued than before the pandemic, and their outstanding bank credit relative to total bank credit to nonfinancial firms is lower than in previous years. Taken together, these findings suggest that zombie firms not only had limited access to external financing in normal times, but they also did not disproportionately tap the bond or bank loan markets to raise new money during the pandemic.

Figure 8 provides additional insights about the credit conditions available to zombie firms in 2020. The left panel plots the distribution of interest rates that zombie firms and nonzombie firms with high default probability (distressed nonzombie firms) paid on their outstanding debt in 2020. As shown, zombie firms borrowed in 2020 at interest rates that were higher, on average, than those paid by distressed nonzombie firms. In addition, as reported in the right panel, zombie firms reduced their leverage throughout 2020, in stark contrast to all nonzombie firms, which increased debt balances in the first two quarters of 2020, likely as a result of the corporate "dash for cash" that translated into outsized issuance of corporate bonds and drawdowns of credit lines (Acharya and Steffen, 2021, Brunnermeier and Krishnamurthy, forthcoming).

Note: The left panel reports the interest rate distribution for firms in zombie status and for distressed firms in nonzombie status in 2020. The right panel reports the change in aggregate outstanding balances relative to the previous quarter for zombie and nonzombie firms. In the left panel, the interest rate is computed as interest expenses divided by total outstanding debt; and distressed firms are in the top quartile of default probability based on the naïve version of the Merton distance-to-default model of Bharath and Shumway (2008).

Altogether, the evidence indicates that zombie firms did not benefit much more than comparable nonzombie firms from the easing of financing conditions in 2020. If anything, these firms reduced their leverage and, when they borrowed, they did so at higher rates than those paid by nonzombie firms close to default. There is also no indication that zombie firms benefitted much from the credit and lending facilities that the Federal Reserve created in support of credit conditions amid the COVID-19 pandemic. For example, none of the firms that in our sample were classified as zombies in 2019 participated in the Secondary Market Corporate Credit Facility and only one firm borrowed under the Main Street Lending Program.


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