The Chinese zombie firm: dilemma and resolution

Abstract

The problems of over-capacity of zombie firms in China have attracted much attention. However, little is known theoretically, and even less empirically, about the boundaries and causes of zombie enterprises. This article extends a model to identify the characteristics of zombie firms in consideration of supply-side structural reform in China. We focus on the cause of zombie firms under the background of the ‘de-capacity’ strategy in China. Using a sample of Chinese listed companies over the period 2006–2018, we find that the proportion of zombie firms in the manufacturing industry declined significantly due to expansionary fiscal policy in 2011. Moreover, the structure of ownership, operational capabilities, and debt-paying ability co-varies positively, with state-owned enterprises being most prone to becoming zombie firms. The results allow us to construct various insights into how to govern the zombie firm. These results offer a frame for dealing with zombie firms. Our results are also robust in the sensitivity test of changing the measurement of zombie firms.

Keywords:

• Zombie firm
• corporate governance
• supply-side structural reform
• state-owned enterprise
• financing policy—Financial Risk and Risk Management—Capital and Ownership Structure—Value of Firms—Goodwill
• Bankruptcy—Liquidation
• Government Policy and Regulation

JEL CLASSIFICATION:

• D21
• D61
• M13
• M21

Disclosure statement

No conflict of interest has been included in this paper.