In response to the COVID-19 pandemic, governments across the world have implemented a comprehensive set of policies to support the corporate sector. This included a range of fiscal support measures as well as payment moratoria. While these measures were overall quite successful in cushioning the economic impact of COVID-19 on the corporate sector, they also raised concerns that they may have unintentionally also supported non-viable (“zombie”) companies.
Against this background, the Joint Vienna Institute and the Croatian National Bank (HNB) organized a virtual half-day peer workshop on the topic of non-viable (“zombie”) companies. The workshop was designed to provide a forum for central bank staff working on this topic to present on-going research, share insights and discuss methodological questions related to the analysis of corporate 'zombification'. The workshop addressed the demography and prevalence of 'zombie' companies and their potential impact on financial stability, economic growth, and development. The event was moderated by Ivan Huljak (HNB) and Reiner Martin (JVI).
After the introductions by the JVI Director, Herve Joly and the Croatian National Bank Governor, Boris Vujčić, the event featured an introductory lecture by Professor Takeo Hoshi (University of Tokyo and Asian Bureau of Finance and Economic Research). Professor Hoshi’s presentation on “Zombies again?” was based on Japan’s long experience with “zombie firms” as well as new research in the field. Professor Hoshi explained that not all unprofitable firms are zombies. Therefore the identification process should include information on firms receiving subsidies from banks (via lower interest rates) or from the government. The next presentation was delivered by a group of authors from the European Central Bank (Luca Mingarelli, Jonas Wendelborn, Beatrice Ravanetti and Tamarah Shakir). This presentation also focused on methodological perspectives regarding the identification of zombie firms. The authors showed that different identification approaches result in different sets of firms characterized as zombies. The authors thus argue in favor of introducing a general procedure to increase the overlap between the various methods, which can help to distinguish between “real zombie” firms and “close-to-zombie” firms.
The second part of the event consisted of two presentations looking at Croatia and Austria respectively. Using the example of Croatia, Ivan Huljak explained the challenges of using the interest coverage as a criterion for zombie definition and showed an alternative approach based on operating efficiency. He also emphasized the general importance of increasing the knowledge about the corporate sector for financial stability. Christian Beer and Walter Waschiczek (both OeNB) explained how the share of zombie companies in Austria decreased between 2009 and 2018. The authors emphasized that zombie firms are larger and have less favorable risk characteristics; however, the sample plays a significant role in the zombie detection process.
In the concluding Q&A session, participants agreed that it is important to continue working on this topic. A more precise definition of zombie companies is important for policymakers, especially in order to improve the targeting of potential future support measures. More generally, from a financial stability perspective, it is important to have a better understanding of the functioning of the corporate sector and its demography.
Looking ahead, the JVI plans to organize more such peer learning workshops on important economic and financial issues.
Reiner Martin, Lead Economist, Joint Vienna Institute
Ivan Huljak, Principal Advisor, Croatian National Bank