Consequences of zombie businesses: Australia’s experience

Author name: 
Bowman J

This paper assesses the consequences of zombie businesses in Australia between 2001/02 to 2018/19. Zombie businesses are broadly defined as businesses whose ability to meet interest expenses from current profits is less compared with other firms operating within the same industry. This work finds that an increasing share of labour sunk into zombie businesses is correlated with weaker activity for viable businesses operating within the same industry. However, it does not find that zombie firms adversely affect the allocative efficiency of labour and capital and does not reduce the responsiveness of business exits to productivity. Further, the spillover effect of zombie firms does not appear to be propagated by the crowding out of financing or the imposition of additional entry barriers for firms operating within the same industry. Overall, the stable share of labour allocated to zombie firms at an aggregate level since 2007 suggests that it is unlikely that the adverse effects of zombie firms explain the slowdown in Australia’s economic activity since the mid 2000s.

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