The Norwegian living dead : an empirical study of the prevalence of zombie firms in Norway, their characteristics, consequences and policy implications

Abstract

Zombie firms are mature firms having persistent problems meeting their interest payments. Previous research links the rise of these firms to falling productivity performance in the OECD, one of the most important drivers of welfare. In this thesis, we study Norwegian zombie firms over time using a data set consisting of all Norwegian firms. We find that the prevalence of zombie firms has increased over time, from 0.97 percent in 1997 to 2.12 percent in 2016, which is in line with the development in several other OECD countries. However, we question whether this is a clear trend, as the share of zombies has been falling since 2011. Our results suggest that increased total assets decrease the probability of being a zombie for the relatively smaller firms, but increase the probability for relatively bigger firms. We also find that foreign ownership increases the chance of being a zombie and that the probability of being a zombie firm tends to decrease with the number of employees. Furthermore, we investigate the consequences of the zombie firms, taking a closer look at their possible distortionary effects on healthy firms. Controlling for cyclical effects at the industry level, we find indications that higher shares of industry capital sunk in zombies distort capital and employment growth for the average non-zombie in the period 1999–2016. Our results also suggest that young firms are disproportionately affected. These results could be of interest to policy makers in the design of insolvency regimes, ensuring a viable environment for productivity growth.