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Policy responses to COVID-19 may create zombie lending, harming healthy firms. However, this study reveals a statistical issue: firm performance is often used to define zombies, creating a misleading correlation without causal meaning.

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Area of Science:

  • Economics
  • Finance
  • Econometrics

Background:

  • COVID-19 policy responses included credit guarantees for firms.
  • Existing literature suggests an increase in zombie firms negatively impacts healthy firm performance.
  • This negative correlation is often cited as evidence of zombie firms crowding out healthy ones.

Purpose of the Study:

  • To investigate the identification problem in the literature linking zombie firms and healthy firm performance.
  • To determine if the observed negative correlation is causal or a statistical artifact.

Main Methods:

  • The study analyzes the relationship between healthy firm performance and the fraction of zombie firms.
  • It employs econometric methods to address potential endogeneity and identification issues.
  • The analysis considers general conditions for the distribution of firm performance.

Main Results:

  • A significant identification problem exists because firm performance is often used to define zombie firms.
  • Under general conditions, the correlation between healthy firm performance and zombie firms is a mechanical result of increasing zombie firm fractions.
  • This correlation lacks causal interpretation.

Conclusions:

  • The negative relationship between healthy firm performance and zombie firms, as commonly reported, may not be causally driven.
  • The findings suggest that policy interventions should be cautious about the interpretation of firm performance metrics in the context of zombie firms.
  • Further research is needed to disentangle causal effects from statistical artifacts in zombie firm literature.