A Study on the Determinants of Zombie Firms: Based on Debt

Abstract

Purpose – This study empirically analyzes the effect of debt on the risk of entering zombie firms. Design/Methodology/Approach – This study empirically analyzes using a logistic model as to whether debt acts as a determinant of zombie firms using Korea listed firms data from 2010 to 2021. The risk of entering a zombie firms uses the interest coverage ratio. If the interest coverage ratio is less than 1, the risk of entering a zombie firm is considered to have occurred. Using the debt growth ratio and changes in total borrowings and bonds payable to total assets (TBBP) as explanatory variables, we analyze whether the debt increases the possibility of entering zombie firms. Findings – First, debt increasing has significant and positive effects on the risk of entering zombie firms, which is a factor that prevents the firm from continuing business activities as profitability deteriorates due to increased financial costs. Second, while the ratio of debt increase has significant result only at a specific stage, the change in TBBP is significant in all stages. This implies that weak financial structure stability has a greater effect on the possibility of firm insolvency than the burden of interest increases. Research Implications – This study has the following contributions. First, we confirm whether debt can act as a determinant of zombie firms. Second, by analyzing debt growth and debt dependence, we confirm that the weakening of financial stability has a greater impact on the risk of entering a zombie firm than the increase in financial costs.