The Walking Dead Zombie Firms and Productivity Performance in OECD Countries

THE WALKING DEAD? ZOMBIE FIRMS AND PRODUCTIVITY PERFORMANCE IN OECD COUNTRIES

Dan AndrewsDeputy Head of Structural Policy Analysis Division, OECD Economics Department

with Müge Adalet McGowan and Valentine Millot

http://www.oecd.org/eco/The-Walking-Dead-Zombie-Firms-and-Productivity-Performance-in-OECD-Countries.pdf





2. Are weak firms stifling productivity growth?

5. Can we improve the design of exit policies?

October 2016 October 2017

Exit Policies and Productivity Growth

4. Can we improve the measurement of exit

policies?

March 2016

1. How do we think about the exit margin, productivity and policy?

3. What happens to the workers when firms exit?

October 2016 April 2016 - March 2017

Coping withCreative

Destruction: Reducing the Costs of Firm

Exit Policies and Productivity Growth: a

Framework for Analysis

New cross-country policy indicators of insolvency

regimes

The Walking Dead?: Zombie

Firms and Productivity

Performance in OECD countries

New empirical evidence of exit

policies and productivity

growth

Background: Why are we worried?Contributions to potential output per capita growth

(dY*) in the OECD

Source: OECD June 2016 Economic Outlook database; OECD calculations.

Collapse in dY* due to slowing labour productivity (LP) Pre-crisis: MFP story Post-crisis: Capital story

Fears of structural slowing in LP and that the legacy of the crisis may permanently scar on dY*

Worst case scenario? The emergence of “zombie firms”, which depress investment and reallocation patterns.

A lost decade? How likely is a full-blown Japan-style scenario?

Zombie firms are a hot issue in the press but do they really matter? Why we haven’t dismissed it outright: 1. Policy conditions are conducive in

some countries: Impaired banking sectors, ultra loose

monetary policy Crisis-induced SME support not yet

withdrawn Weak insolvency regimes + waning

structural reform ambition

2. Micro-data evidence that the efficiency of the exit margin may be declining.

“Zombie” firms – much ado about nothing?

TROUBLE ON THE EXIT MARGIN?: SMOKING GUNS FROM MICRO-

DATA

Average of MFPR (Wooldridge) across each 2-digit sector (log, 2001=0)

Productivity dispersion is rising

Source: Andrews, D. C. Criscuolo and P. Gal (2016), “The Best versus the Rest: The Global Productivity Slowdown, Divergence across Firms and the Role of Public Policy”, OECD Productivity Working Papers, No. 5.

Frontier

Frontier

Laggards Laggards

5

6

7

8

9

10

11

12

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Spain Italy Other

But productivity-enhancing reallocation is declining

Difference in capital growth between high and low productivity firms (%pts)

Source: Adalet McGowan, M., D. Andrews and V. Millot (2017), “The Walking Dead? Zombie Firms and Productivity Performance in OECD countries”, OECD Economics Department Working Paper No. 1372.

Over time, it has become less likely that high productivity firms expand and low productivity firms contract.

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0.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Young firms (0-5 years)

Mature firms (6-10 years)

Non-viable old firms (older than 10 years)0

4

8

12

16

20

24

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Young firms (0-5 years)

Mature firms (6-10 years)

Non-viable old firms (older than 10 years)

Rising entry barriers and declining market contestability

Share of firms Percent; average across 24 countries

MFPR relative to viable old firmsLog point differential

Higher MFP entry threshold, marginal firms survive with ↓MFP

Fewer young firms, marginal firms increasingly survive.

Source: Andrews, D. C. Criscuolo and P. Gal (2016), “The Best versus the Rest: The Global Productivity Slowdown, Divergence across Firms and the Role of Public Policy”, OECD Productivity Working Papers, No. 5.

• What are the implications of the prolonged survival of marginal firms for aggregate productivity?

• Continued survival of marginal firms could harm aggregate growth via two key channels:– Direct effect: lowers unweighted average productivity

– Indirect effects: market congestion • Stifles growth opportunities for healthier firms

• Deters entry of potentially innovative firms

Key questions

Lack of systematic cross-country evidence on the prevalence and consequences of zombies: Academic literature is Japan-specific: Caballero, Hoshi & Kashyap

(2008); Peek & Rosengren (2005) Cursory exploration in other countries (BoE, BoK) Achayra et al (2016): “Whatever it takes”

ECB’s OMT program indirectly recapitalized periphery banks via sovereign bond holdings

Under-capitalised banks used OMT windfall gains to direct loans to zombies to avoid incurring losses on loan portfolio

Lending triggered by OMT windfall gains did not directly raise real activity but evidence of zombie congestion

Our contribution: towards systematic cross-country

evidence on Zombies

We use harmonised cross-country firm level balance sheet data to explore the: Prevalence of zombie firms in different OECD

countries Implications of resources sunk in zombies for:

Non-zombie firm performance: investment and employment growth (Caballero et al., 2008) and by firm age;

Dynamic capital reallocation and aggregate MFP (Foster et al., 2016).

Our contribution: towards systematic cross-country

evidence on Zombies

THE WALKING DEAD: NEW CROSS-COUNTRY EVIDENCE ON

“ZOMBIE FIRMS”

• Largest firm-level dataset of companies worldwide– Best coverage for developed EU countries (ESP, FRA, ITA, GBR, ..)

• Updated and longer time-series than previous versions• Based on balance sheets and income statements,

contains information on– Revenues (output); employment, assets and materials (inputs) and

financial conditions (indebtedness, profits)

• Data cleaning and filtering:– Monetary variables are deflated using 2-digit industry deflators from

OECD STAN + national accounts

– Prices are expressed in industry PPP

Dataset – ORBIS

• Comparing coverage with official business demography (OECD SDBS) and national accounts data– Construction of weights by country*industry* firm size* year

• Construct key variables for analysis:– Capital stock (from book values, implied gross investment then apply PIM)– Productivity measures at the firm- and industry-levels: labour prod. and

MFP, using several methodologies: Solow, OLS and Wooldridge. (see Gal 2013)

– Zombie measures

• Sample used for analysis:– Panel of 9 countries 2000-2013: BE, ES, FI, FR, GB, IT, KR, SE, SI– Cross-section of 13 countries in 2013: AT, BE, DE, ES, FI, FR, GB, IT, LU,

KR, PT, SE, SI

Dataset – ORBIS

Approach 1: Persistent financial weakness:A. Firms with interest coverage ratio<1 for 3

consecutive years (Bank of Korea)B. Firms with negative profits (Bank of England) C. Firms with negative value added

We focus on incumbent firms aged ≥ 10 years

Methodology: how do we identify zombie firms?

Methodology: how do we identify zombie firms?

Approach 2: Firms receiving subsidized bank credit (Caballero et al., 2008):• Actual interest repayments are less than an estimated benchmark based

on the firm debt structure and market interest rates

where = short-term loans (less than one year) of firm i at the end of year t

• Pros: more directly linked to “evergreening” or “forbearance”; more exogenous?

• Cons: data availability is more challenging relative to (1)

Baseline analysis is based on Approach (1A) but our results hold in a smaller sample based on Approach (2). 1A and 2 highly correlated.

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0

1

2

3

4

5

6

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Share of zombie firms (LHS) Labour productivity relative to non-zombie firms (RHS)

% log points

The rise of zombie firmsFirms aged ≥10 years with an interest coverage ratio<1 over 3 consecutive years

Unweighted average across selected OECD countries


The prevalence and resources sunk in zombie firms has risen

Firms aged ≥10 years and with an interest coverage ratio<1 over three consecutive years

Source: Adalet McGowan, M., D. Andrews and V. Millot (2017), “The Walking Dead? Zombie Firms and Productivity Performance in OECD countries”, OECD Economics Department Working Paper No 1372.

0

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2007

2010

2013

2007

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2013

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2010

2013

2007

2010

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2007

2010

2013

2007

2010

2013

2007

2010

2013

2007

2010

2013

2007

2010

2013

BEL ESP FIN FRA GBR ITA KOR SWE SVN

Number of firms Employment Capital Stock%

THE WALKING DEAD: ZOMBIE FIRMS AND LABOUR

PRODUCTIVITY

BASELINE ANALYSIS

• In a world without zombies, incumbents hit by unfavourable shocks exit, and are replaced by new entrants hit by favourable productivity draws.

• In a world with zombies, subsidised incumbents don’t exit when hit by unfavourable shocks (“sclerosis”). In turn:– Congestion: non-zombies must compete with zombies for

scarce resources; zombies may even ↓ prices & ↑ wages to compete aggressively

– Non-zombies bare all the adjustment to shocks: potentially productive entrants decide not to enter and healthy incumbents scrap expansion plans

– Entrants must clear a higher productivity threshold to compensate for lower profitability caused by congestion

Channels: key features from model in Caballero et al

(2008)

Baseline specification taken from Caballero et al (2008):

• Y (k=3): 1-investment, 2-employment growth; 3-MFP• nonZ is dummy=1 if firm is a non-zombie; =0 if zombie firm• Z is the share of industry capital sunk in zombie firms• X: Firm level controls (firm age, size etc)• Country-industry-year fixed effects: cyclical shocks• Standard errors clustered at country*industry*year level

Methodology: zombies and “average” non-zombie

performance icstcsticstcsticsticst

kicst XZnonZnonZY 1321 *

Predictions: β2<0 for K & E | β2>0 for MFP• The presence of zombie will generate distortions for non-

zombie firms: depress K & E growth + widen the MFP gap

Zombie congestion and “average” non-zombie firm

performance


Zombie measure: interest coverage ratio<1 over the past three years and firms older than 10 years old

(1) (2) (3) (4) (5) (6)

VARIABLES log(I/K) dLog Emp MFP log(I/K) dLog Emp MFP0.07372*** 0.06943*** 0.52738*** 0.06342*** 0.08335*** 0.57842***(0.00288) (0.00172) (0.01198) (0.00794) (0.00479) (0.02918)

-0.13257*** -0.03759*** 0.47019*** -0.07791** -0.04757* 0.49190***

(0.01752) (0.01197) (0.10471) (0.03752) (0.02490) (0.17904)Firm Age and Size Controls YES YES YES YES YES YESIndustry*Country Fixed Effects NO NO NO YES YES YESIndustry*Country*Year Fixed Effects YES YES YES NO NO NOObservations 10,121,532 10,121,532 7,956,552 1,234,596 1,234,596 1,030,477AdjR2 0.0193 0.0244 0.832 0.0152 0.0218 0.815

Non-zombie dummy i,t X Industry

zombie sharess,t

Non-zombie dummy i,t

A: Panel of 9 countries, 2003-2013 B: Cross section of 13 countries,

• Using more exogenous measures of zombie firms in a smaller sample of countries; i.e. firms receiving subsidised credit (Caballero et al, 2008).

• Using different definitions of zombies based on interest coverage ratio (different age and persistence thresholds; excluding outlier firms such as very large SOEs).

• Using SDBS weights or excluding firms <20 employees, to address ORBIS representativeness issues.

• Pre-crisis regressions and excluding Italy and Spain.• Controlling for the share of old firms in the industry.• Controlling for firm sales growth (Caballero et al. 2008).• Different fixed effects structures and clustering techniques.• Using employment sunk in zombie firms.

Results are robust to:

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0.0

Employment

%

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Old (>5 years old) Young (<=5 years old)

0

2

4

6

8

10

12

14

MFP gap with zombie firms

%

Zombie congestion particularly penalises young

firmsImpact of one standard deviation increase in the zombie capital share on non-zombies by firm age

Evidence of rising MFP dispersion and barriers to entry may be connected to the zombie phenomenon

The “average” firm is tenuous, given widespread firm

heterogeneityWithin-industry MFPR distribution moments, 2013Log points; Unweighted average across industries

Within-industry moment Mean Std. Dev. IQ range

Median 5.785 1.841 2.258IQ range 0.917 0.443 0.43990-10 percentile range 1.844 0.778 0.86795-5 percentile range 2.477 1.008 1.180

All firms

What if zombie congestion disproportionately constrains the growth of more productive firms?

Widespread heterogeneity in firm productivity creates scope for productivity-enhancing reallocation

• Canonical models of firm dynamics predict that conditional on size, firms with higher MFP grow more quickly (Foster et al., 2016; Decker et al., 2016; Cooper et al., 2007)

where:• Firm MFP is the deviation from country-industry-year averages• Z is the share of industry resources sunk in zombie firms• Firm controls are firm age and size• Country-industry-year fixed effects• Standard errors clustered at country*industry level

Methodology: zombie congestion and reallocation

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑔𝑟𝑜𝑤𝑡ℎ𝑖s𝑐𝑡 = 𝛿1𝑀𝐹𝑃isct−1 + 𝛿2𝑀𝐹𝑃isct−1 ∗𝑍sct + 𝛿3𝐹𝑖𝑟𝑚 𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖𝑠𝑐𝑡−1 + 𝛿sct + 𝜖𝑖s𝑐𝑡

Zombie congestion and capital reallocation


Zombie measure: interest coverage ratio<1 over the past three years and firms older than 10 years old

(1) (2) (3) (4)

VARIABLES K-share L-share K-share L-share0.07819*** 0.08241*** 0.06458*** 0.06588***

(0.002) (0.002) (0.006) (0.004)-0.14017*** -0.26720*** -0.09088*** -0.15578***

(0.018) (0.026) (0.034) (0.034)Firm Age and Size Controls YES YES YES YESIndustry*Country Fixed Effects NO NO YES YESIndustry*Country*Year Fixed Effects YES YES NO NOObservations 6,405,339 6,405,339 902,271 902,271AdjR2 0.0308 0.0310 0.0211 0.0211

MFPi,t-1 X Industry zombie sharess,t

B: Cross section of 13 countries, A: Panel of 9 countries, 2003-2013Zombie measure Zombie measure

MFPi,t-1

Zombie congestion slows down productivity-enhancing capital reallocation – i.e. more productive firms are particularly harmed

• Using more exogenous measures of zombie firms in a smaller sample of countries; i.e. firms receiving subsidised credit (Caballero et al, 2008)

• Using different definitions of zombie based on interest coverage ratio (different age and persistence thresholds; excluding outlier firms such as very large SOEs).

• Different productivity measures

• Using SDBS weights or excluding firms with less than 20 employees, to address ORBIS representativeness issues

• Pre-crisis regressions and excluding Italy and Spain• Excluding zombie firms from the sample

• Different fixed effects structures and clustering techniques

Results are robust to:

THE WALKING DEAD: ZOMBIE FIRMS AND LABOUR

PRODUCTIVITY

ECONOMIC SIGNIFICANCE

• Channels linking zombie congestion to aggregate growth:1. Lower unweighted average productivity

2. Lowers within-industry dynamisma) Stifles growth opportunities for healthier firms

b) Deters entry of potentially innovative firms

3. Less efficient between-industry reallocation

• We study the two counterfactuals:– CF1: Reducing zombie K share to “best practice” level in 2013: How

much scope is there for policy reforms targeted at the exit margin to boost productivity?

– What if the zombie K-share had not risen after 2007? What is the contribution of the rise in zombie congestion to the productivity slowdown?

Zombie congestion and productivity: economic

signfiicance

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1.0

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5

10

15

20

25

ITA BEL PRT ESP DEU FIN LUX SWE KOR AUT GBR FRA SVN

Zombie shares (LHS) %Gains to productivity-enhancing capital allocation (RHS)% %

CF1: Zombie congestion distorts capital reallocation…

Impact of reducing zombie congestion to level observed in Slovenia on productivity-enhancing capital reallocation

Difference in capital growth between high and low productivity firms (%pts), 2013


… with significant costs to aggregate MFP

Counterfactual gains to aggregate MFP from reducing zombie capital share to industry best practice level, 2013


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1.0

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ESP ITA SWE Average KOR GBR BEL FIN SVN FRA

• Channels linking zombie congestion to aggregate growth:1. Lower unweighted average productivity

2. Lowers within-industry dynamisma) Stifles growth opportunities for healthier firms

b) Deters entry of potentially innovative firms

3. Less efficient between-industry reallocation

• We study the two counterfactuals:– CF1: Reducing zombie K share to “best practice” level in 2013: How

much scope is there for policy reforms targeted at the exit margin to boost productivity?

– CF2: What if the zombie K-share had remained at pre-crisis levels? What is the contribution of the rise in zombie congestion to the productivity slowdown?

Zombie congestion and productivity: economic

significance

CF2: Zombie congestion and non-zombie performance

Source: Adalet McGowan, M., D. Andrews and V. Millot (2017), “The Walking Dead? Zombie Firms and Productivity Performance in OECD countries”, OECD Economics Department Working Paper No. 1372..

Investment and employment loss of a typical non-zombie firmdue to a rise in the zombie capital share after 2007

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ITA FIN ESP SWE BEL Average KOR FRA SVN GBR

Cumulative lost investment Cumulative lost employment%

If the zombie capital share had not risen from 2004 levels (i.e. adjustment dynamics remained at their more responsive 2004 levels), then: Perhaps one-half of the deterioration in capital

allocative efficiency in ESP and ITA could have been avoided; and

The contribution of capital reallocation to aggregate productivity could have been on average 0.7% and 1% higher in ESP and ITA respectively.

CF2: Implications for MFP

THE WALKING DEAD: NEXT STEPS AND LINKS WITH POLICY

Link newly sourced commercial data on firms entering insolvency procedures to our firm level database to study:

• The disposal/restructuring of weak firms: are zombie firms more likely to be liquidated in some countries than others? Are restructuring procedures effective?

• The design of exit policies: are these cross-country differences related to the policy environment, including insolvency regimes? The role of bank forbearance?

• Aggregate implications: what types of reforms may raise aggregate productivity growth via a better functioning exit margin?

Future work: if zombies are problem, what can we do

about it?

Public policy, the exit margin and aggregate productivity growth

Aggregate productivity growth

Market exit of non-viable firms

Internal restructuring by viable firms

More productive firms expand

Strength of market selection

Resource reallocation from exiting firms

Efficient insolvency

regimes

Competitive pressures

Product market regulations

Public support schemesFinancial regulationFiscal distortionsStance of monetary policyCorporate governance Enviromental regulationsRule of law

Employment protection legislationActive labour market policiesFinancial developmentHousing market policiesIntellectual property markets Size contingent policies

Judicial efficiency

0

5

10

15

20

1998 2000 2002 2004 2006 2008 2010 2012 2014

Bank NPLs to Total LoansZombie Capital Share

%

Italy

Zombie congestion and NPLs are connected,

especially in Italy(1) (2)

2002-2013 2002-2004 to 2011-2013

0.015*** 0.017**(0.005) (0.007)

GDP Growthc,t-2 YES YESCountry Fixed Effects YES YESTime Fixed Effects YES YESObservations 78 31AdjR2 0.617 0.554

Dependent Variable: Zombie Capital Share

NPLc,t-2

Specific features of insolvency regimes and productivity growth

Intensive margin

Reallocation effectFuture within firm

productivity

Specific features of insolvency regimes Restructuring of viable firms

Exit of non-viable firms

Creditors ability to initiate restructuring + +

Availability of a stay on assets + +

Possibility and priority of new financing over unsecured creditors

+ - +

Retention of incumbent management during restructuring

"+/-" +

Possibility to “cram-down” a restructuring plan on dissenting creditors

+ +

Limited involvement of courts + +

Design of priority rules, favouring objectives other than the efficient exit of firms

- - -

Availability of a "fresh start" + + +

Extensive margin

Selection effect

World Bank indicators do not fully capture these design features

Source: Adalet McGowan, M and D. Andrews (2016), “Insolvency regimes and productivity growth: A framework for analysis”, OECD Economics Department Working Papers, No. 1309.

2. Are weak firms stifling productivity growth?

5. Can we improve the design of exit policies?

October 2016 October 2017

Exit Policies and Productivity Growth

4. Can we improve the measurement of exit

policies?

March 2016

1. How do we think about the exit margin, productivity and policy?

3. What happens to the workers when firms exit?

October 2016 April 2016 - March 2017

Coping withCreative

Destruction: Reducing the Costs of Firm

Exit Policies and Productivity Growth: a

Framework for Analysis

New cross-country policy indicators of insolvency

regimes

The Walking Dead?: Zombie

Firms and Productivity

Performance in OECD countries

New empirical evidence of exit

policies and productivity

growth

ALMPs can help re-integrate workers displaced by firm exit

D. Andrews and A.Saia (2016), “Coping with Creative Destruction: Reducing the Costs of Firm Exit”, OECD Economics Department Working Paper, No 1353.

Impact of higher spending on ALMPs on the re-employment probability

Impact of increasing spending ALMP to 1 % of GDP , by reason for job loss

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3

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9

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15

Firm closure Other involuntary reason

Reason for job loss in period t-1

Percent

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25

Low Entry Barriers Average Entry Barriers High Entry Barriers

Impact of ALMPs on re-employment according to the level of entry barriers

Percent

Reducing entry barriers boosts the effectiveness of

ALMPsImpact of increasing spending ALMP to 1 % of GDP on the re-employment probability

D. Andrews and A.Saia (2016), “Coping with Creative Destruction: Reducing the Costs of Firm Exit”, OECD Economics Department Working Paper, No 1353.

Economy & Finance

The Walking Dead Zombie Firms and Productivity Performance in OECD Countries