Edward Altman is the Max L. Heine Professor of Finance, Emeritus, at the Stern School of Business, New York University, and Director of the Credit and Fixed Income Research Program at the NYU Salomon Center. He is joining us at RiskMinds International and QuantMinds International 2022. One of the topics he will be discussing is global zombies: What are the pros and cons of corporate zombies, how do you measure whether a firm is a 'zombie' and how has Covid-19 impacted zombism? Read an outline of his research below and secure your spot to hear Eds presentation here.
We propose a two-step filtering process using interest coverage ratio and default prediction models to measure the extent of “zombieism” globally: a phenomenon that describes the existence of companies that are insolvent but continue to survive due to unusual market conditions and the support of financial institutions and government. We find that the average share of publicly traded zombie firms in the world’s 20 largest economies increased significantly in the past 30 years, at above 7% at the end of 2020.
We also find that financial market development, creditor rights, and debt enforcement efficiency help explain cross-country variations in zombie ratios. Using staggered bankruptcy reforms in eight countries after 2000 as an exogenous variation to the modernization of bankruptcy law, we find that the zombie ratio declines by 1.3 percentage points after the reforms in those countries. Reforms strengthening creditor rights lead to a larger reduction.
Want to know more? Read the full paper here.