Fear the Walking Dead? Zombie Firms in the Euro Area and Their Effect on Healthy Firms' Credit Conditions

Abstract: The extensive monetary and fiscal support measures related to the Covid-19 pandemic have reinvigorated the policy and academic debate around zombie firms. These are firms that are no longer profitable but still operate. This thesis attempts to shed light on the questions of whether zombie firms exist in the euro area, and whether spillovers occur from zombie firms to healthy firms' credit conditions. The ESCB's novel AnaCredit dataset which includes loan-by-loan data from 2018 to 2021, matched with the Orbis dataset on firms' accounting data, allows the analysis of a broader set of countries and firms than in the existing zombie literature, on a new level of granularity. It is found that around 2\% of all firms in the euro area economy are zombie firms. Then, to identify the relationship between zombie prevalence and healthy firms' interest rates and access to new credit, a panel regression with fixed effects is employed. The results indicate that zombie firms pay higher interest rates and receive less new credit than healthy firms. The spillover effect of the existence of zombie firms on healthy firms' new credit is not significant. For interest rates, an adverse spillover effect cannot be confirmed, rather, the total effect of the existence of zombie firms significantly lowers healthy firms' interest rates. Thus, zombie firms do exist in the euro area, but they do not seem to pose significant negative externalities on the credit conditions of healthy firms in the economy.