Bank competition and zombie company: Empirical evidence from China

Abstract

This paper aims to explore the relationship between bank competition and zombie companies. Using a representative micro-database of Chinese enterprises from 1998–2013, we find that bank competition promotes the creation of zombie companies, and there are more zombies in areas with fierce competition. The mechanism analysis reveals that bank competition lowers credit standards and reduces company information review efficiency, making it easier for SMEs and companies with opaque information to obtain credit support, yet these companies are more susceptible to becoming zombies due to unstable operations and high-risk appetite. We further find that loose monetary policy will encourage bank risk-taking and amplify the impact of bank competition. However, increased local financial risk, enhanced bank regulation, and decreased government intervention will alleviate it. Our study provides new explanations for the creation of zombie companies and new evidence for the “competition-fragility” view.