Abstract
Economists have examined the rise of so-called zombie firms in recent years. Such firms remain in financial distress for a prolonged period while financial creditors keep them alive through continued lending. Based on signaling theory, we investigate zombie firms in the context of corporate restructuring and relationship banking. Combining a theoretical approach with a multiple case study on German medium-sized firms facing private workouts, we derive the following main propositions: (i) Banks face information asymmetry and may have incentives for loan extension (i.e., rescheduled installments and additional collateral) when deciding about restructuring financing. In the case of financing unviable restructuring strategies, this can lead to the emergence of zombie firms. (ii) For this reason and in contrast to recent research, not only weakly capitalized but also healthy banks may face such incentives and might end up in financing zombie firms. (iii) Relationship banking reduces bank information asymmetry. Thus, it may enable banks to detect clients’ distress situations in the early stages and to support resolving them. Hence, guiding and inspecting banks (i.e., credit guidance) to carry out supportive relationship banking might be a key to preventing the emergence of zombie firms. The propositions bear several implications relevant to academic research, bank management and banking regulation.
Acknowledgments
The author would like to thank Prof. Yuri Biondi and the anonymous reviewers for their helpful comments and suggestions.
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Articles in the same Issue
- Frontmatter
- Research Articles
- Too Much Technology and Too Little Regulation? The Spectacular Demise of P2P Lending in China
- Zombie Firms, Corporate Restructuring and Relationship Banking: Credit Guidance as a Key to Tackle Zombie Lending?
- How Tax Credit Shapes Firm R&D Strategies?
- Hare or Hedgehog? The Role of Law in Shaping Current Technological Trends in the Securities Post-trading System
Articles in the same Issue
- Frontmatter
- Research Articles
- Too Much Technology and Too Little Regulation? The Spectacular Demise of P2P Lending in China
- Zombie Firms, Corporate Restructuring and Relationship Banking: Credit Guidance as a Key to Tackle Zombie Lending?
- How Tax Credit Shapes Firm R&D Strategies?
- Hare or Hedgehog? The Role of Law in Shaping Current Technological Trends in the Securities Post-trading System