What Impacts the Probability of Firms Becoming Zombies? An Empirical Investigation

Abstract

This study examines the financial determinants of the probability of firms becoming a zombie firm using a panel data taken from multiple non-financial companies from 2010 to 2023. Zombie firms are defined as being firms that cannot afford to pay interest out of operating earnings over extended periods of time and have sustained financial fragility. The analysis uses logistic and probit regression models for assessing the impact of leverage, profitability, liquidity and firm size on the probability of becoming zombie. The empirical findings show that leverage has a significant effect on the likelihood of financial distress, with the higher the debt levels the higher the odds of zombification by more than twofold. Profitability has the greatest protective effect and decreases predicted zombie probability by more than forty percent per unit increase in return on assets. Liquidity also has a similar effect of reducing distress risk by improving short term solvency and firm size has a small but consistently negative link to zombification. Robustness checks such as alternative specifications of the variables and subsampling estimation to check the stability of results are done. Diagnostic tests suggest no concerns in terms of serial correlation, cross sectional dependence or multicollinearity, so the estimated models are reliable. Overall, the study points to the importance of financial structure and operating performance to firm resilience and staving off long term stagnation.