Does bank competition inhibit the formation of zombie firms?

Abstract

The intensified competition in China's banking industry is an important embodiment of gradual financial reform. Based on the Annual Survey of Industrial Enterprise Database, we find that the probability of forming zombie firms decreases by 0.48% with 1% increase of city-level bank competition. The result still holds when we introduce an IV based on the number the bank branches in 1937 when China's bank industry was at the boom before the World War II. The underlying mechanism is that the financial expense ratio of zombie firms increases by 0.17% with 1% increase of bank competition, which supports the “competition-stability” view. We also introduce the exogenous shock event of China's WTO accession and proxy variable from the survey on foreign banks in 1935 when China's bank industry was at the boom before the war, and the results are still robust.