ABSTRACT
Using a survey of and financial data for Japanese small- and medium-enterprises (SMEs), this paper examines the determinants of firms' use of the business support programs provided by the Japanese government during the COVID-19 pandemic and their effect. With respect to the determinants, we obtain the following three findings: First, firms were more likely to have obtained subsidized loans, grants, or subsidies the more their sales had fallen during the pandemic, suggesting that funds flowed to firms that were adversely affected by the pandemic. Second, the likelihood that firms obtained funds was higher if their credit scores were lower or if they were classified as "zombies” and/or "low-return borrowers” before the pandemic, suggesting that the government programs also helped firms that had been under-performing before the pandemic. Third, firms were more likely to receive funds if they had a stronger relationship with their main bank before, suggesting that bank relationships play an important role in firms' access to government programs. Regarding the causal effects, we obtain the following three findings: First, except for the subsidies for employment adjustment, the support programs increased the cash holdings of user firms. Second, subsidized loans from private financial institutions lowered exit rates, while none of the programs had a significantly positive effect on employment relative to non-users (or in absolute terms). Third, the credit scores and profit-to-sales ratio of firms that used the support programs decreased and the likelihood of such firms being a zombie and/or a low-return borrower increased. Overall, our findings provide a cautionary tale in that the business support programs produced mixed results in that they may have prevented business failures but have also helped to prop up firms that are not viable in the long run. © 2022 Elsevier Inc.
ABSTRACT
We investigate the effect of government support on firm zombification during the COVID-19 crisis for Belgium, Germany, Spain, France, United Kingdom, the Netherlands and the United States. For this purpose, we use a simple model that links insolvency developments at the macro level to GDP developments. We first observe from the data that insolvencies have declined during the crisis despite economic contraction. We then use the model to calculate the total firms saved from insolvency by government intervention and the fraction of which are not healthy, the zombies. It appears that government intervention has been effective in saving firms during the height of the crisis in Q2 of 2020. The impact is smaller in Q3 when the recovery set in. But it comes at a cost of efficiency as it causes significantly higher zombification in the economy. The effect can be seen in both quarters, most notably in Belgium. In Germany and the Netherlands, zombification was low in Q2 but soared in Q3. The reverse effect was visible in Spain as the number of insolvencies picked up in Q3. Therefore, government intervention during the crisis has reinforced the existing trend of zombification there. With government support only gradually withdrawing in the recovery phase of the crisis and probably further pushing up the number of zombie firms, risk management faces the challenging task of detecting them. We offer a few suggestions. These are based on the classification of zombies, including ICR and Tobin’s q, as well as research on underlying drivers. Compared to the sector median, zombies appear smaller, less productive, slower growing, with lower investments and higher leverage despite higher equity issues and implied interest rate subsidies. Complementary to this market-based information, more proprietary, higher frequency data such as payment behaviours, revenue growth pace change, credit sourcing, bank covenant compliance and management competencies can be monitored using scorecards. Finally, we recommend a high level of vigilance and an additional provisioning to anticipate any delayed effects of the crisis. © Henry Stewart Publications 1752-8887 (2021).
ABSTRACT
This study continues the author's examination and forecasts as to the impact of Covid-19 on the US credit cycle after one and a half years since the pandemic first began. We explore the enormous build-up of global debt even before the pandemic commenced and the subsequent record debt expansion through mid-2021. New debt peaks, especially for nonfinancial corporate debt, are analyzed as to their potential impact on future default rates and the implications for the US credit markets once again starting a new benign cycle in a continuing low interest rate environment. We ask whether the spectacular success of the US central bank and its monetary policy and secondary-market purchases has also promoted potentially destructive unforeseen consequences for debt rated BBB and below. Large- and small-firm defaults and bankruptcies in both 2020 and 2021 are compared, and our expectations about those firms' solvency status once the government and central bank supports diminish and are eliminated are examined. Finally, we introduce the concept of global zombie firms and suggest that this growing phenomenon be analyzed more robustly and critically with new criteria and empirical analysis.
ABSTRACT
We design and conduct a firm-level survey on the use of COVID-19-related government programs, in collaboration with Tokyo Shoko Research, LTD (TSR). Combining the survey results with the financial statements of the respondent firms, we investigate the factors behind the allocation of various government programs. We find that firms that had low credit scores in 2019, before the COVID-19 pandemic, were more likely to apply for and receive the subsidies and concessional loans offered by the Japanese government in 2020, controlling for the sales growth after the onset of the pandemic. Firms with low credit scores are not necessarily zombies, which are defined to be the firms that are non-viable but kept alive by assistance from creditors and/or the government. Our result suggests that the government assistance may have subsidized some poorly performing firms that were not yet zombies before the pandemic.
ABSTRACT
The purpose of this work is to investigate the influence of macroeconomics determinants on non-performing loans (NPLs) in the Italian banking system over the period 2008Q3–2020Q4. We mainly contribute to the literature by being the first empirical article to study this relationship in the Italian context in the recent period, thus providing fresh evidence on the macroeconomic impact on NPLs, i.e., on the credit risk of Italian banks. By employing the Autoregressive Distributed Lag (ARDL) cointegration model, we are able to investigate the short and long-run effects of macroeconomic factors on NPLs. The empirical findings show that gross domestic product and public debt have a negative impact on NPLs. On the other hand, we find that the unemployment rate and domestic credit positively influence impaired loans. Finally, we find evidence of the “gamble for resurrection” approach, i.e., Italian banks tend to support “zombie firms”.
ABSTRACT
Based on a survey (7-13 April 2020) we evaluate the reaction of Swiss firms towards the COVID-19 crisis. Firms show little pro-active reactions towards the crisis, but decrease their business activities. The firms in the survey report that the decline in foreign demand is the single most important reason for their deteriorating business situation. Firms that faced a more difficult business situation before the crisis are affected more severely during the crisis. Moreover, we investigate the impact of the Swiss federal loan program (Bundeshilfe) on the business activities. To this end, we develop a stylized theoretical model of financially constrained heterogeneous firms. We find that policy makers face a trade-off between immediate higher unemployment rates and long-term higher public spending. The former arises from a combination of a too strong economic impact of the COVID-19 lockdown (demand drop) and too low levels of loans provided. Nevertheless, providing (too) high levels of loans to firms creates zombie firms that are going to default in the future leading to an increase in public spending. (JEL codes: D22, D25, D84, and G33).