Are zombies for real? Evidence from zombie dynamics

This paper analyses zombie firms in a dynamic setup where firm survival not only depends on its current returns, but the firm's exit decision is forward-looking. Building on a model of firm entry and exit and using firm-level data from Finland, we show that the expected future value and growth of a firm are key determinants in whether it is likely to recover from losses accumulated during a spell of weak performance. We find that including firm growth in zombie identification substantially reduces zombie incidence in the data as one third of low interest coverage ratio firms in a common zombie definition are growing companies. Moreover, over a half of exits from zombie status are recoveries to become healthy firms. A policy that may promote the survival of zombie firms is public subsidies. Our analysis does indeed support the notion that subsidized firms are less likely to die, but also their chances of recovery are higher.