The hidden cost of zombification: Zombie firms and corporate policy distortions in emerging markets

Resumo

This study examines how zombie status and zombie prevalence are associated with key corporate financial decisions in 25 emerging market economies over 2002-2021. While prior literature focuses on advanced economies, evidence for emerging markets remains limited, particularly regarding cross-country heterogeneity and the systemic effects of zombification on non-zombie firms. Using firm-level data, we estimate three-level hierarchical models (time-firm-country) to disentangle firm- and country-level effects, complemented by robustness checks. Zombie status is associated with lower investment, lower dividends, lower cash holdings, higher borrowing costs, higher market risk, and higher research and development. Importantly, a higher country-level share of zombie firms is also associated with changes in the financial decisions of non-zombie firms, indicating spillover effects. These findings document the hidden cost of zombification, reflected in its impact on otherwise healthy firms. Zombification is associated with broader financial distortions affecting both distressed and healthy firms. By emphasizing its systemic and cross-country nature, the study provides insights for policymakers concerned with financial stability, credit allocation, and corporate governance in emerging economies.