AEA Papers and Proceedings
ISSN 2574-0768 (Print) | ISSN 2574-0776 (Online)
Weak Corporate Insolvency Rules: The Missing Driver of Zombie Lending
AEA Papers and Proceedings
vol. 112,
May 2022
(pp. 516–20)
Abstract
"Zombie lending"—lending to less-productive firms at subsidized rates—can help banks with misaligned incentives in the short run, but it prolongs economic downturns. We propose that inefficient resolution of insolvency is a significant contributor to this problem. We exploit variation in the efficiency of insolvency across countries to show that lack of formal bankruptcies, cheap (zombie) credit, and stickiness of existing creditors is more common in bad economic periods when insolvency works less well.Citation
Becker, Bo, and Victoria Ivashina. 2022. "Weak Corporate Insolvency Rules: The Missing Driver of Zombie Lending." AEA Papers and Proceedings, 112: 516–20. DOI: 10.1257/pandp.20221078Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- E32 Business Fluctuations; Cycles
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G33 Bankruptcy; Liquidation
- G38 Corporate Finance and Governance: Government Policy and Regulation