Government Subsidy,Investment and Financing Constraints,and the Formation of Zombie Companies

Zombie companies have serious adverse effects on economic development.The relationship between government subsidies and zombie companies is a focus in China’s supply-side structural reform.In this paper,we classify companies into two categories:investment-constrained companies lacking investment opportunities,and fi nancing-constrained companies with limited sources of capital.Based on data of A-share listed companies from 2007 to 2016,this paper examines the relationship between government subsidies and the zombification of companies subject to different types of constraints.We find that more government subsidies have been allotted to investment-constrained companies than financing-constrained ones;government subsidy is one of the various factors that have contributed to company zombification,but the correlation is only significant for investment-constrained companies;financing subsidy dedicated to expanding corporate financing is more effective in helping investment-constrained companies than government subsidies in general,but neither government subsidies nor financing subsidies are effective in preventing investment-constrained companies from turning into zombies.In the robustness test that controls the endogeneity problem of reverse causality,replaces proxy variables,lags subsidy variables and discusses the zombification of loss-making enterprises,the results are still valid.This paper provides a heterogeneous perspective to study the connection between government subsidies and the formation of zombie companies,and in view of subsidy mismatch,puts forward recommendations regarding the use of government subsidies.

The Life-cycle Dynamics of Zombie Companies amongst Listed Firms in China

This paper analyses the life-cycle dynamics of zombie companies-broadly defined as businesses that are consistently unable to meet their interest expenses from current profits-amongst listed firms in China over the period 2008-2019.A large share of zombie companies subsequently return to nonzombie status.This proportion is higher for firms undergoing a major restructuring event,low leverage levels,and with smaller operating expense ratios.However,zombie firms that return to nonzombie status continue to have lower levels of profitability compared with their industry peers and have a higher probability of relapsing into zombie status compared with firms that have never been classified as zombie.Concerted efforts to revive zombie companies using major restructuring events appear insufficient in overcoming the longer term scarring effects of zombification on firms'profitability.The results highlight the potential benefits of the ongoing efforts by Chinese regulators to improve the delisting process.