The Working Dead: Zombie Firms in Australia

Gabriela Araujo, Jonathan Hambur and Gianni La Cava

5 December 2019EMG Workshop, University of New South Wales

Disclaimer: Views expressed in this presentation are those of the authors and not necessarily those of the Reserve Bank of Australia. Use of any results from this presentation should clearly attribute the work to the authors and not to the Reserve Bank of Australia.

Global Zombies

2

Global Zombies By Size and Age

3

Our Boss Doesn’t Believe in Australian Zombies

4

But Do Australian Zombies Exist…?1. How many zombie firms are there?2. Are zombies real?3. Do zombies pose risks to the economy?

5

So What’s a Zombie?• A zombie is a firm that…

1. Has debt2. Is at least 3 years old3. Doesn’t make enough profit to cover its interest payments

• Interest Coverage Ratio (ICR) = EBIT/interest payments• We consider multiple definitions:

– Broad definition: ICR < 1 for 3 years on average– Narrow definition: ICR < 1 for 3 consecutive years

6

Zombie Data• Business Longitudinal Analysis Data Environment (BLADE)

– All businesses in Australia between 2001/02 and 2016/17– Focus on private non-financial sector– P&L and balance sheet indicators (e.g. sales, profits, interest payments)– Some caveats (e.g. no balance sheets for sole traders)

• Publicly listed company data– P&L and balance sheet indicators– Can directly identify firms– Can look at composition of debt

7

Why Do We Care About Zombies?• Financial stability: They may pose persistent credit risks if always

on the verge of insolvency• Economic stability: Zombies may clog up economic resources and

distort competition

8

2014201120082005 20172

4

6

8

10

%

2

4

6

8

10

%

ZombiesShare of all businesses

Narrow

Broad

Sources: ABS; RBA

Debt Assets Headcount0

3

6

9

12

%

0

3

6

9

12

%

Zombies’ Share of ResourcesShare of total resources by type, full sample*

Based onbroad definitionSources: ABS; RBA

11

2014201120082005 20170

5

10

15

20

25

%

0

5

10

15

20

25

%

Zombies by IndustryShare of all businesses*

Agriculture

Mining

Other industries**

Based onbroad definitionExcludes public administrationand finance & insurance sectors

Sources: ABS; RBA

2014201120082005 20170

4

8

12

16

%

0

4

8

12

16

%

Zombies by Type of BusinessShare of each type*

Unincorporated businesses

Companies

Based onbroad definitionSources: ABS; RBA

2014201020062002 20180

5

10

15

20

25

%

0

5

10

15

20

25

%

Zombies in the Listed SectorShare of all non-financial listed companies

Narrowexcluding resources

Narrow

Broadexcluding resources

Broad

Interest coverage ratio (ICR) less than100 per cent whenaveraged overa three year period; ICRis defined as EBITDA divided bynet interestexpensesICRless than100 per cent for three consecutive yearsResources sector consists of companies in the energyand materialssectors

Sources: Morningstar; RBA

142014201120082005 2017

0

4

8

12

%

0

4

8

12

%

Zombies by Firm SizeShare of all businesses by type*

Large businesses(revenue > $5m)

Small businesses(revenue $5m)

Sources: ABS; RBA

The `Life’ of a Zombie

• Zombie causes: Why do firms become zombies?

• Zombie evolution: What happens once they become a zombie?

15

16

2004-20102011-2014

Zombies** Viable***7

8

9

10

%

7

8

9

10

%Exit rates*

Excludes observations in2015 and 2016 due to data quality issuesBroad definitionExcludes firms less than3 years old and firms without debt

Sources: ABS; RBA

But Are Zombies Real…? Like, Really?• Yes – most zombies are created, not born

– Evidence from the life of a zombie• No – some may be part of a `profit shifting’ arrangement

– Evidence from business enterprise groups and foreign ownership• No – zombies don’t have bank debt

– Evidence from listed company balance sheets

18

19

Zombies by Legal Structure and SizeShare of all businesses by type*

Part of a Group**

20122007 20170

10

20

30

%

Large businesses

Small businesses***

Not Part of a Group

20122007 20170

10

20

30

%

Based onbroad definitionBusinesses part of anEnterprise Group as identified by the ABSSmall businesses consist of firms with less thanor equal to $5 millioninannual revenue; large businesses consist of firms withmore than$5million inannual revenue

Sources: ABS; RBA

20

Bank loansLoan from related entitiesConvertible notes

Zombies Viable firms0

10

20

30

40

%

0

10

20

30

40

%

Debt Finance of Selected CompaniesShare of firms in each sample, by firmtype*

Based ona randomsample of listed companies. Inlcudes around 110companies ineachcategory.

Source: Annual reports

21

Debt Finance Over TimeShare of firms in each sample, by firmtype and time period*

ZombiesPre-crisisPost-crisis

Bankloans

Loansfromrelated

parties

0

15

30

45

% Viable firms

Bankloans

Loansfromrelated

parties

0

15

30

45

%

Based ona randomsample of listed companies. Inlcudes around 110companies ineachcategory.

Source: Annual reports

Fear the Working Dead

Zombie Risks to the Economy

• Zombies lower aggregate productivity– They are less productive– They make others less productive

• Zombie spillover (or infestation) effects– Crowd out economic resources (labour and capital)– The effect is strongest on young viable firms– Zombies also appear to reduce start-up rates

23

24

25

Zombie Risks to the EconomyRegression model (for non-zombie firms):

Y𝑖𝑖𝑖𝑖𝑖𝑖 = 𝛽𝛽𝑍𝑍𝑍𝑍𝑍𝑍𝑍𝑍𝑍𝑍𝑍𝑍𝑖𝑖𝑖𝑖 + 𝛾𝛾𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑍𝑍𝐶𝐶𝐶𝐶𝑍𝑍𝑖𝑖𝑖𝑖𝑖𝑖 + 𝜎𝜎𝑖𝑖 + 𝜇𝜇𝑖𝑖 + 𝜀𝜀𝑖𝑖𝑖𝑖𝑖𝑖

• Y𝑖𝑖𝑖𝑖𝑖𝑖 is a firm-level indicator of activity (e.g. sales growth) for viable firm i in industry j in year t

• ZSHARE is the share of zombies in the industry

• CONTROLS include the growth rate of the industry and the share of firms with debt in each industry

26

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Table 1: Firm-level Regressions Coefficients and t-statistics

Growth in: Output Employment Labour Productivity

Capital investment

Industry-level controls Zombie share -0.78***

(-9.40) -0.13*** (-3.05)

-0.94*** (-6.90)

-0.07*** (-5.27)

Debtor share -0.18 (-1.28)

0.11 (1.51)

0.06*** (0.36)

-0.04 (-1.32)

GVA growth 0.01*** (2.99)

-0.00 (-0.74)

0.01*** (12.32)

-0.00 (-0.80)

Firm-level controls Sales growth 0.08***

(21.43) -0.01***

(-5.69) Size -0.46***

(-82.49) -0.50*** (-126.84)

-0.58*** (-131.59)

-0.02*** (-19.07)

Age -0.02*** (-12.87)

0.01*** (9.63)

-0.01*** (-4.05)

-0.00*** (-16.70)

Age squared 0.00*** (11.02)

-0.00*** (-12.14)

0.00*** (9.74)

0.00*** (10.73)

Firm fixed effects Y Y Y Y Time fixed effects Y Y Y Y

R squared 49.5% 43.6% 51.0% 44.2% Within R squared 31.6% 33.8% 40.1% 0.01%

Observations 12 463 078 12 463 078 11 039 571 12 418 884 Notes: Standard errors are clustered by industry. *, **, *** denote statistical significance at the 10 per cent, 5 per cent and 1 per cent levels respectively. Firm and year fixed effects estimates not shown. Regressions estimated on sample of non-zombie firms. Some outliers have been removed

Zombie Risks to the EconomyRegression model (for industries):

Y𝑖𝑖𝑖𝑖 = 𝛽𝛽𝑍𝑍𝑍𝑍𝑍𝑍𝑍𝑍𝑍𝑍𝑍𝑍𝑖𝑖𝑖𝑖 + 𝛾𝛾𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑍𝑍𝐶𝐶𝐶𝐶𝑍𝑍𝑖𝑖𝑖𝑖 + 𝜎𝜎𝑖𝑖 + 𝜇𝜇𝑖𝑖 + 𝜀𝜀𝑖𝑖𝑖𝑖𝑖𝑖

• Y𝑖𝑖𝑖𝑖 is an industry-level indicator of activity (e.g. sales growth) for industry j in year t

• ZSHARE is the share of zombies in the industry

• CONTROLS include the growth rate of the industry and the share of firms with debt in each industry

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Table 2: Industry-level Regressions Coefficients and t-statistics

Entry rate

Exit rate GVA growth

Employment growth

Productivity growth

Capital investment

Zombie share -0.18***

(-5.76) -0.07*** (-3.25)

-0.72*** (-3.19)

-0.36*** (-4.29)

-0.26 (-1.27)

-0.06** (-2.31)

Debtor share -0.11** (-2.45)

-0.19** (-7.19)

0.42** (2.37)

0.12 (1.64)

0.19 (1.64)

0.06 (1.33)

Sales growth 0.02*** (2.49)

-0.02 (-0.17)

0.44*** (10.66)

-0.01 (-1.30)

Lagged level -0.38*** (-11.89)

-0.16*** (-11.12)

-0.55*** (-12.98)

0.34*** (4.31)

Industry fixed

effects Y Y Y Y Y Y

Time fixed effects

Y Y Y Y Y Y

R squared 58.6% 57.3% 24.1% 46.1% 29.6% 49.9% Within R squared

22.8% 24.2% 19.7% 41.9% 26.9% 13.6%

Observations 6352 6352 5806 5806 5806 5806 Notes: Standard errors are clustered by industry. *, **, *** denote statistical significance at the 10 per cent, 5 per cent and 1 per cent levels respectively. Industry and year fixed effects estimates not shown.

Zombie Conclusions• Zombies live amongst us

– More prevalent amongst companies, particularly listed companies– Most prevalent in the farm and mining sectors

• But are they real…?– Yes and no!– Most are not `born’ zombies– But many don’t have bank debt

• Zombies appear to adversely affect…– Growth in output, employment and productivity– Business entry and exit rates

30

Questions?