Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe

Abstract

This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.

The Real Effects of Zombie Lending in Europe

“…These model results complement several empirical studies who show that zombie rm survival -sometimes connected to an inecient bankruptcy regime -can impair aggregate productivity growth and the pace of recovery following recessions (see, e.g., Andrews and Petroulakis, 2019, Blattner, Farinha and Rebelo, 2018, Caballero, Hoshi and Kashyap, 2008, Jorda et al (2020), Adalet McGowan, Andrews and Millot 2017, Adalet McGowan, Andrews and Millot, 2018.…”

“…The combination of these eects results in an increase in aggregate output, investment and total factor productivity in the counterfactual scenario with no forbearance lending. These model results complement several empirical studies that nd zombie rm survival can impair aggregate productivity growth and the pace of recovery following recessions (see, e.g., Andrews and Petroulakis, 2019, Blattner, Farinha and Rebelo, 2018, Caballero, Hoshi and Kashyap, 2008, Jorda et al (2020, Adalet McGowan, Millot 2017, Adalet McGowan, Andrews andMillot, 2018). Taken together, my results suggest that forbearance lending practices contributed to the lower output experienced by the euro area following the onset of the European sovereign debt crisis.…”

“…I also nd that the vast majority of rms in receipt of forbearance lending in the benchmark scenario are low-quality. Several studies show that lower quality rms are more likely to receive some kind of loan forbearance because lenders face zombie lending incentives in order to avoid taking a balance sheet hit due to the write-o of bad loans (see, e.g., Acharya et al, 2019, Andrews and Petroulakis, 2019, Blattner, Farinha and Rebelo, 2018, Giannetti and Simonov, 2013, Schivardi, Sette and Tabellini, 2017, Storz et al, 2017. My model highlights that information asymmetry faced by lenders is another key driver.…”

“…Rather, I outline a framework that allows for an evaluation of how zombie lending aects the dynamics of rms. In this respect, I build on existing empirical research that has focused on zombie lending incentives and the consequences of forbearance lending (see, e.g., Acharya et al, 2019, Acharya et al, 2020a, Acharya et al, 2020b, Andrews and Petroulakis, 2019, Blattner, Farinha and Rebelo, 2018, Bonm et al, 2020, Caballero, Hoshi and Kashyap, 2008, Schivardi, Sette and Tabellini, 2017, Storz et al, 2017. Compared to those studies, which are largely based on reduced form analyses, this paper provides new insights about the impact of forbearance lending on rm behavior and their dynamics.…”

“…Recent studies have uncovered widespread forbearance lending to European rms (see, e.g., Acharya et al, 2019, Banerjee and Hofmann, 2020, Blattner, Farinha and Rebelo, 2018, Adalet McGowan, Andrews and Millot, 2018, Schivardi, Sette and Tabellini, 2017. Weak banks have extended credit to weak rms in order to avoid the declaration of nonperforming loans on their own balance sheets (see, e.g., Acharya et al, 2019, Acharya et al, 2020b, Andrews and Petroulakis, 2019, Blattner, Farinha and Rebelo, 2018, Schivardi, Sette and Tabellini, 2017, Storz et al, 2017. In this paper, I study the impact of these lending practices on the nancial decisions of rms, rm dynamics and economic performance.…”