How do political connections affect the formation of zombie firms? Evidence from Chinese manufacturing listed enterprises

Abstract

Zombie firms that rely on government subsidies and bank loans have seriously affected the healthy development of economies. This paper uses data from Chinese listed manufacturing enterprises from 2007 to 2017 to test and analyse the relationship between political connections and zombie enterprises. The study finds: (i) political connections are positively correlated with the 'zombification' of enterprises; (ii) credit subsidies play an intermediary role between political connections and 'zombification' of enterprises, with the acquisition of large credit subsidies the main path to the 'zombification' of politically connected enterprises; and (iii) firms that have political connections may use credit subsidies for inefficient over-investment. This study has value for other countries in clarifying the causes of zombie firms and preventing politically connected enterprises from becoming zombie firms.

Can common institutional ownership inhibit the formation of zombie firms? Evidence from China

“…It is generally accepted that zombie firms are those that continue to incur losses, have no hope of reversing their deficits, and rely mainly on government subsidies or bank loans to continue their lives (McGowan et al, 2019; San‐Jose et al, 2021; Alvarez et al, 2023). From this, it can be seen that zombie firms are characterised by two features: low business performance and dependence on government and banks for survival (Shao et al, 2022). The dominant approach in economics is to identify zombie firms from the perspective of bank credit.…”

“…On the other hand, some enterprises appear to have normal real interest rates, but in fact, their profits are not enough to pay the interest on loans. They rely on ‘borrowing new loans to pay off old ones’ from the bank, which is not the type of zombie firms that the CHK methodology can identify (Shao et al, 2022). To compensate for the shortcomings of the CHK method, Fukuda and Nakamura (2011) added two criteria, which is referred to as the ‘FN‐CHK method’.…”

“…However, in reality, there are enterprises that, despite losses or even insolvency, have been able to maintain their operations because they can obtain subsidies from the government or financial institutions, and have become ‘zombie firms’ (McGowan et al, 2019; San‐Jose et al, 2021; Alvarez et al, 2023). Scholars have proposed a variety of definitions of ‘zombie firms’ based on their characteristics, but primarily based on two criteria (Shao et al, 2022): one is that the enterprise is in financial crisis, on the verge of insolvency or is in fact in a state of insolvency; and the other is that the enterprise is still able to obtain credits, despite its poor financial condition. Focusing on either criterion alone is insufficient to accurately portray the essential attributes of ‘zombie firms’.…”

“…One of the structural problems of China's real economy is the existence of zombie firms in the manufacturing industry (Guo et al, 2022;Ren et al, 2023). With continued assistance from the government and banks, zombie firms have had difficulty exiting the market (Zhu et al, 2019), accumulating a large amount of backward production capacity and squeezing market space, which has become a long-standing problem plaguing China's economic development (Shao et al, 2022).…”

Food companies' productivity dynamics: Exploring the role of intangible assets

“…Furthermore, it could reduce productivity by allowing low-performance zombie firms. In fact, Shao et al (2022) recently found empirical evidence citing that political connections were associated with the zombification of Chinese manufacturing firms. To confirm this institutional hypothesis, in Figure 1, we plot the estimated coefficients of leverage on the vertical axis and the degree of financial access taken from the IMF Financial Development Index database on the horizontal axis.…”