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Zombie Firms and Soft Budget Constraints in the Chinese Stock Market

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  • Chenyan Zhang
  • Yongqiao Chen
  • Huiyu Zhou

Abstract

The growth of zombie firms has caused increasing concern. The present study seeks to understand why zombie firms have been emerging in recent 10 years and to further explore the mechanisms of their formation. Based on a dataset of Chinese listed companies from 2012 to 2016 and empirical analysis, the present study ascribes the prevalence of zombie firms to soft budget constraints. After using a modified identification model in the Chinese context, we concluded that zombie firms have access to some external resources such as credit support from banks and governmental subsidies, substantiating soft budget constraints among zombie firms. To explain this phenomenon, further analysis reveals that zombie firms bear a heavier policy burden by hiring excess employees, which will bring them more subsidies and a stronger relationship with government in return. This result indicates that policy burden is the reason for soft budget constraints, which exacerbates the zombie firm problems in China.

Suggested Citation

  • Chenyan Zhang & Yongqiao Chen & Huiyu Zhou, 2020. "Zombie Firms and Soft Budget Constraints in the Chinese Stock Market," Asian Economic Journal, East Asian Economic Association, vol. 34(1), pages 51-77, March.
    • Handle: RePEc:bla:asiaec:v:34:y:2020:i:1:p:51-77
    DOI: 10.1111/asej.12194
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    Cited by:

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    3. Ren, Meixu & Zhao, Jinxuan & Zhao, Jingmei, 2023. "The crowding-out effect of zombie companies on fixed asset investment: Evidence from China," Research in International Business and Finance, Elsevier, vol. 65(C).
    4. Joel Bowman, 2022. "The Life‐cycle Dynamics of Zombie Companies amongst Listed Firms in China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 30(5), pages 185-205, September.
    5. Wang, Changrong & Richardson, Grant & Cao, Yanming, 2024. "Long live the walking dead? Corporate tax avoidance and zombie firms in China," The British Accounting Review, Elsevier, vol. 56(3).
    6. Ren, Meixu & Zhao, Jinxuan & Zhao, Jingmei, 2023. "Why is it difficult for Chinese companies to operate across regions in China?—Evidence from zombie companies," International Review of Financial Analysis, Elsevier, vol. 87(C).
    7. Lu, Hongyou & Liu, Min & Song, Wenjing, 2022. "Place-based policies, government intervention, and regional innovation: Evidence from China's Resource-Exhausted City program," Resources Policy, Elsevier, vol. 75(C).
    8. Yixuan Duan & Min Guo & Yixuan Huang, 2022. "Leverage of Local State-Owned Enterprises, Implicit Contingent Liabilities of Government and Economic Growth," Sustainability, MDPI, vol. 14(6), pages 1-23, March.
    9. Olivér Kovács, 2022. "Zombification and Industry 4.0—Directional Financialisation against Doomed Industrial Revolution," Social Sciences, MDPI, vol. 11(5), pages 1-24, May.
    10. Jiani Li & Jie Li & Tianhang Zhou, 2023. "State ownership and zombie firms: Evidence from China's 2008 stimulus plan," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(4), pages 853-876, October.
    11. Ungerer, Christina & Reuther, Kevin & Baltes, Guido, 2021. "The lingering living dead phenomenon: Distorting venture survival studies?," Journal of Business Venturing Insights, Elsevier, vol. 16(C).

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