Zombie firms and corporate risk-taking

Purpose This paper examines how subsidized credit affects the risk-taking behavior of zombie firms – businesses that have lost economic viability and ideally should have exited the market but persistently operate by relying on external support. It explores how artificially low-cost financing distorts their investment incentives, encouraging riskier behavior beyond common mechanisms like asset substitution or “gambling for resurrection.” Design/methodology/approach Using data on North American publicly traded firms (2000–2022), risk-taking is measured by forward-looking earnings volatility over three-year windows, adjusted for market and industry effects. Zombie firms are identified primarily by sustained low interest coverage, complemented by alternative methods for robustness. Identification strategies include firm fixed effects, propensity score matching (PSM) and a synthetic difference-in-differences approach centered on the 2008 financial crisis, which serves as a shock increasing zombification exogenously. Findings Analyses reveal that zombie firms consistently exhibit significantly higher risk-taking than non-zombie firms, with results robust across definitions and model specifications. Furthermore, zombie firms demonstrate higher risk-taking compared to non-zombie firms, including those with elevated bankruptcy risk and those approaching market exit. Originality/value This study fills a key empirical gap linking zombie lending to corporate risk behaviors in credit-distorted environments, providing valuable insights for policymakers and regulators.