Zombie companies in Portugal: the non-tradable sectors of construction and services

March 23, 2018

This paper studies the prevalence and economic consequences of zombie companies in Portugal, specifically in two major sectors of activity, construction and services. These sectors are less exposed to external competition and zombie companies may remain due to reduced competitive forces.

Zombie companies are supported by easy credit access and low interest rates and would fail in other market conditions, all else equal. Specifically, zombie companies are those operating for more than 10 years that have an interest coverage ratio lower than 1–signifying that interest expense is at least as large as company earnings–for at least 3 consecutive years. The study shows that between 2008 and 2015, in the Portuguese non-tradable sectors of construction and services, between 5% (2008) and 12% (2013) of companies were zombies.

Survival function of zombies before and after the reforms
Caption: Survival function of zombies before and after the reforms

The results indicate that the presence of zombies in these sectors may have delayed the recovery of the economy, hampering the credit allocation to healthy companies. A greater presence of zombie companies in construction and services has significantly negative implications on healthy companies operating in the same sector, namely by reducing investment and employment. The study also finds that the coefficients for labor productivity are positive and significant, confirming that an increase in the fraction of assets “trapped” in zombie companies is related to an increase in the productivity gap between zombie companies and healthy companies.

Click here to go to the paper by Gabriel Osório de Barros, Filipe Bento Caires and Dora Xarepe Pereira.


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