Zombie firms and corporate savings: Evidence from Chinese manufacturing firms

Abstract

Zombie firms may have substantial financial consequences. In a simple theoretical model, we show that the presence of zombie firms may increase the debt financing cost of non-zombie firms and induce the latter to rely more on internal funds. Consistent with model predictions, our empirical evidence on Chinese manufacturing firms from 1998 to 2007 demonstrates that, the presence of zombie firms will induce the non-zombie firms to save more, and this effect is particularly strong if the non-zombie firms are financially constrained and if the financial market condition is tight.