Skip to main content
SpringerLink
Log in

Zombie firms and corporate governance: What room for maneuver do companies have to avoid becoming zombies?

  • Original Paper
  • Published:
Review of Managerial Science Aims and scope Submit manuscript

Abstract

This paper is an attempt to empirically examine the influence of corporate governance on zombie theory. Recent data indicates that the problem affects more than 10% of all firms and is worth close to a billion Euros in the European Union. It is thus an important problem worth analysing in European countries, and Spain is one of the worst affected. The sample studied here thus consists of Spanish companies with negative equity over the five business years from 2013 to 2017. The analysis focuses on establishing how corporate government aspects-board size, dedication to board meetings, concentration of ownership, owners and gender of the CEO-, affect the severity of extreme zombie firms. It uses the amount and temporality dimensions of EZIndex. The results confirm that internal dimensions such as corporate governance are important aspects to be introduced into zombie analysis. To control zombiness our results suggest structuring boards of directors with more than one member, CEOs with non-exclusive dedication, non-concentrated ownership and female CEOs. We also find that all these factors affect both amount and temporality, so factors do not affect zombie companies partially but totally. The contributions of the paper are twofold: first it includes corporate governance factors as a relevant approach for understanding zombie theory; and second, it encourages companies to manage risk-taking decisions efficiently so as to avoid the proliferation of zombies.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Extreme zombie status is a quasi-chronic situation, so the population selected remains fairly stable over time. Of the 2141 firms classed as zombies in 2017, 83.7% were still classed as such in the following year. This makes the results more robust, as they are not conditioned by the time frame considered. Table 9 also shows the differences in the descriptive statistics between the firms which ceased to be zombies in 2018 (i.e. which ceased to record negative equity) and those which were stil zombies.

  2. The Kaiser–Meyer–Olkin Measure of sampling adequacy is 0.621.

  3. We have checked different models including all variables that significantly affect the Extension factor, i.e. Gender, Concentration, Owners and Dedication (see Table 9 in Appendix). However, the best model does not include all four variables but only three. This is technically possible: the best model includes only three of the four variables because those three absorb the effect of the fourth. Huberty and Morris (1989) explain in their paper that univariate results predict but do not guarantee multivariate ones; this is because of the shared effect considered in multivariate analysis, which is not included in univariate ones.

References

  • Abor J (2007) Corporate governance and financing decisions of Ghanaian listed firms. Corp Gov Int J Bus Soc 7(1):83–92

    Google Scholar 

  • Adalet M, Andrews D, Millot V (2017) The walking dead?: Zombie firms and productivity performance in OECD countries. Working paper no. 1372, OECD Publishing

  • Ahearne AG, Shinada N (2005) Zombie firms and economic stagnation in Japan. IEEP 2(4):363–381

    Google Scholar 

  • Anderson R, Sattar M, Reeb D (2004) Board characteristics, accounting report integrity, and cost of debt. J Account Econ 37(3):315–342

    Google Scholar 

  • Anderson DW, Melanson SJ, Maly J (2007) The Evolution of Corporate Governance: power redistribution brings boards to life. Corp Gov Int Rev 15(5):780–797

    Google Scholar 

  • Andrews D, Petroulakis F (2019) Breaking the shackles: zombie firms, weak banks and depressed restructuring in Europe. Working papers no. 1433, OECD Economics Department. https://doi.org/10.1787/18151973

  • Avouyi-Dovi S, Lecat R, O'Donnell CW, Bureau B, Villetelle JP (2016) Are insolvent firms being kept afloat by excessively low interest rates? Rue de la Banque nº 29. https://publications.banque-france.fr/sites/default/files/medias/documents/rue-de-la-banque_29_2016-09_en.pdf

  • Baixauli-Soler JS, Sanchez-Marin G (2015) Executive compensation and corporate governance in Spanish listed firms: a principal–principal perspective. RMS 9(1):115–140

    Google Scholar 

  • Banerjee R, Hofmann B (2018) The rise of zombie firms: causes and consequences. BIS Quarterly Review September. https://www.bis.org/publ/qtrpdf/r_qt1809g.pdf

  • Barako DG, Hancock P, Izan H (2006) Factors influencing voluntary corporate disclosure by Kenyan companies. Corp Gov Int Rev 14(2):107–125

    Google Scholar 

  • Barnea A, Rubin A (2010) Corporate social responsibility as a conflict between shareholders. J Bus Ethics 97:71–86

    Google Scholar 

  • Bernasek A, Shwiff S (2001) Gender, risk, and retirement. J Econ Issues 35(2):345–356

    Google Scholar 

  • Bertrand M (2011) New perspectives on gender. In: Ashenfelter O, Card D (eds) Handbook of labor economics, vol 4. North Holland, pp 1543–1590

  • Bhabra GS, Yao Y (2011) Is bankruptcy costly? Recent evidence on the magnitude and determinants of indirect bankruptcy costs. J Appl Finance Bank 1(2):39

    Google Scholar 

  • Blažková I, Dvouletý O (2020) Zombies: who are they and how do firms become zombies? J Small Bus Manag. https://doi.org/10.1080/00472778.2019.1696100

    Article  Google Scholar 

  • Borio C (2018) A blind spot in today’s macroeconomics? BIS-IMF-OECD joint conference on Weak productivity: the role of financial factors and policies, 10–11 January, Paris. https://www.bis.org/speeches/sp180110.html

  • Bravo F, Reguera-Alvarado N (2017) The effect of board of directors on R&D intensity: board tenure and multiple directorships. R&D Manag 47(5):701–714

    Google Scholar 

  • Bruche M, Llobet G (2011) Walking Wounded or living dead? Making banks foreclose bad loans. Banco de España Discuss Pap 675:1–51

    Google Scholar 

  • Byrnes JP, Miller DC, Schafer WD (1999) Gender differences in risk taking: a meta-analysis. Psychol Bull 125:367–383

    Google Scholar 

  • Caballero R, Hoshi T, Kashyap AK (2008) Zombie lending and depressed restructuring in Japan. Am Econ Rev 98(5):1943–1977

    Google Scholar 

  • Carpenter MA, Westphal JD (2001) The strategic context of external network ties: examining the impact of director appointments on board involvement in strategic decision making. Acad Manag J 44(4):639–660

    Google Scholar 

  • Chakravarty S, Rutherford LG (2017) Do busy directors influence the cost of debt? An examination through the lens of takeover vulnerability. J Corp Finan 43:429–443

    Google Scholar 

  • Chang CS, Yu SW, Hung CH (2015) Firm risk and performance: the role of corporate governance. RMS 9(1):141–173

    Google Scholar 

  • Chen CR, Steiner TL (1999) Managerial ownership and agency conflicts: a nonlinear simultaneous equation analysis of managerial ownership, risk taking, debt policy, and dividend policy. Financ Rev 34(1):119–136

    Google Scholar 

  • Cheng S (2008) Board size and the variability of corporate performance. J Financ Econ 87(1):157–176

    Google Scholar 

  • Chittoor R, Aulakh PS, Ray S (2019) Microfoundations of firm internationalization: the owner CEO effect. Glob Strateg J 9(1):42–65

    Google Scholar 

  • Coles JL, Daniel ND, Naveen L (2008) Boards: does one size fit all? J Financ Econ 87(2):329–356

    Google Scholar 

  • Croson R, Gneezy U (2009) Gender differences in preferences. J Econ Lit 47(2):448–474

    Google Scholar 

  • Dai X, Qiao X, Song L (2019) Zombie firms in China’s coal mining sector: identification, transition determinants and policy implications. Resour Policy 62:664–673. https://doi.org/10.1016/j.resourpol.2018.11.016

    Article  Google Scholar 

  • Daily CM, Dalton DR (1994) Bankruptcy and corporate governance: the impact of board composition and structure. Acad Manag J 37(6):1603–1617

    Google Scholar 

  • Dam L, Scholtens B (2013) Ownership concentration and CSR policy of European multinational enterprises. J Bus Ethics 118(1):117–126

    Google Scholar 

  • Darrat AF, Gray S, Park JC, Wu Y (2016) Corporate governance and bankruptcy risk. J Acc Audit Financ 31(2):163–202

    Google Scholar 

  • Eckel CC, Grossman PJ (2002) Sex differences and statistical stereotyping in attitudes toward financial risk. Evol Hum Behav 23(4):281–295

    Google Scholar 

  • Elloumi F, Gueyié JP (2001) Financial distress and corporate governance: an empirical analysis. Corp Gov Int J Bus Soc 1(1):15–23

    Google Scholar 

  • Faccio M, Marchica MT, Mura R (2016) CEO gender, corporate risk-taking, and the efficiency of capital allocation. J Corp Finan 39:193–209

    Google Scholar 

  • Fama EF, Jensen MC (1983) Separation of ownership and control. J Law Econ 26(2):301–325

    Google Scholar 

  • Fama EF, Jensen MC (1985) Organizational forms and investment decisions. J Financ Econ 14(1):101–119

    Google Scholar 

  • Fang J, Gao L, Lu Z, Wu W, Yan C (2020) Listed zombie firms and top executive gender: evidence from an emerging market. Pac Basin Financ J. https://doi.org/10.1016/j.pacfin.2020.101357

    Article  Google Scholar 

  • Farooq O (2015) Effect of ownership concentration on capital structure: evidence from the MENA region. Int J Islam Middle East Financ Manag 8(1):99–113

    Google Scholar 

  • Feingold A (1994) Gender differences in personality: a meta-analysis. Psychol Bull 116(3):429–456

    Google Scholar 

  • Ferris SP, Javakhadze D, Liu Y (2020) The price of boardroom social capital: the effects of corporate demand for external connectivity. J Bank Finance 111:105729

    Google Scholar 

  • Fich EM, Slezak SL (2008) Can corporate governance save distressed firms from bankruptcy? An empirical analysis. Rev Quant Financ Acc 30(2):225–251

    Google Scholar 

  • Friend I, Lang LHP (1988) An empirical test of the impact of managerial self-interest on corporate capital structure. J Finance 43:271–282

    Google Scholar 

  • Fukuda SI, Nakamura JI (2011) Why did ‘zombie’ firms recover in Japan? World Econ 34(7):1124–1137

    Google Scholar 

  • Gandía JL (2008) Determinants of interest-based corporate governance disclosure by Spanish listed companies. Online Inf Rev 32(6):791–817

    Google Scholar 

  • Goto Y, Wilbur S (2019) Unfinished business: zombie firms among SME in Japan’s lost decades. Jpn World Econ 49:105–112

    Google Scholar 

  • Grieder T, Ortega J (2020) a financial stability analysis of zombie firms in Canada. Working paper no. 2020-3, Financial Stability Department Bank of Canada, Ottawa, Ontario, Canada

  • Hallak I, Harasztosi P, Schich S (2018) Fear the walking dead? Incidence and effects of zombie firms in Europe. J Econ Sci Res 65:24–40

    Google Scholar 

  • Hambrick DC, D’Aveni RA (1988) Large corporate failures as downward spirals. Adm Sci Q 33(1):1–23

    Google Scholar 

  • Han S, You W, Nan S (2019) Zombie firms, external support and corporate environmental responsibility: evidence from China. J Clean Prod 212:1499–1517

    Google Scholar 

  • Hoshi T (2006) Economics of the living dead. Jpn Econ Rev 57(1):30–49

    Google Scholar 

  • Huang J, Kisgen D (2013) Gender and corporate finance: are male executives overconfident relative to female executives? J Financ Econ 108:822–839

    Google Scholar 

  • Huberty CJ, Morris JD (1989) Multivariate analysis versus multiple univariate analyses. Psychol Bull 105:302–308

    Google Scholar 

  • Hurley AE, Scandura TA, Schriesheim CA, Brannick MT, Seers A, Vandenberg RJ, Williams LJ (1997) Exploratory and confirmatory factor analysis: guidelines, issues, and alternatives. J Organ Behav 18(6):667–683

    Google Scholar 

  • Imai K (2016) A panel study of zombie SMEs in Japan: identification, borrowing and investment behavior. J Jpn Int Econ 39:91–107

    Google Scholar 

  • James HS (1999) Owner as manager, extended horizons and the family firm. Int J Econ Bus 6(1):41–55

    Google Scholar 

  • Jaskowski M (2015) Should zombie lending always be prevented? Int Rev Econ Financ 40:191–203

    Google Scholar 

  • Jensen MC, Meckling WH (1976) Theory of the firm: managerial behavior, agency costs and ownership structure. J Financ Econ 3(4):305–360

    Google Scholar 

  • Jiang X, Li S, Song X (2017) The mystery of zombie enterprises—“stiff but deathless. China J Account Res 10(4):341–357

    Google Scholar 

  • Jiraporn P, Kim JC, Kim YS, Kitsabunnarat P (2012) Capital structure and corporate governance quality: evidence from the Institutional Shareholder Services (ISS). Int Rev Econ Financ 22(1):208–221

    Google Scholar 

  • Johnson J, Powell P (1994) Decision making, risk and gender: are managers different? Br J Manag 5:123–138

    Google Scholar 

  • Kaen FR (2005) Risk management, corporate governance, and the public corporation. In: Frenkel M, Rudolf M, Hommel U (eds) Risk management challenge and opportunity. Springer, Berlin, pp 423–436

    Google Scholar 

  • Klein A (2002) Audit committee, board of director characteristics and earnings management. J Account Econ 33:375–400

    Google Scholar 

  • Kogan N, Wallach MA (1964) Risk taking: a study in cognition and personality. Holt, Reinhart & Winston, Oxford

    Google Scholar 

  • Laeven L, Levine R (2009) Bank governance, regulation, and risk taking. J Financ Econ 93:259–275

    Google Scholar 

  • Lam WR, Schipke MA, Tan Y, Tan Z (2017) Resolving China's zombies: tackling debt and raising productivity. International Monetary Fund

  • Lei AC, Deng J (2014) Do multiple directorships increase firm value? Evidence from independent directors in Hong Kong. J Int Financ Manag Acc 25(2):121–181

    Google Scholar 

  • Levin I, Snyder M, Chapman D (1988) The interaction of experimental and situational factors and gender in a simulated risky decision-making task. J Psychol 122:173–181

    Google Scholar 

  • Liang D, Lu CC, Tsai CF, Shih GA (2016) Financial ratios and corporate governance indicators in bankruptcy prediction: a comprehensive study. Eur J Oper Res 252(2):561–572

    Google Scholar 

  • Linck JS, Netter JM, Yang T (2008) The determinants of board structure. J Financ Econ 87(2):308–328

    Google Scholar 

  • Lopez MC, Serrano AM, Pérez M, García G (2016) Necesidades formativas de las Empresas Familiares de ACEFAM. Cátedra Santander de Empresa Familia, Santander

    Google Scholar 

  • Lopez Iturriaga FJ, Morros Rodriguez I (2014) Boards of directors and firm performance: the effect of multiple directorships. Spani J Finance Account/Revista Española de Financiación y Contabilidad 43(2):177–192

    Google Scholar 

  • McGowan MA, Millot V, Andrews D (2018) The walking dead? Zombie firms and productivity performance in OECD countries. CEPR Economic Policy, October, pp 685–736

  • Mohrman MB, Stuerke PS (2014) Shareowners’ equity at Campbell soup: how can equity be negative? Acc Educ 23(4):386–405

    Google Scholar 

  • Nakamura JI (2016) Japanese firms during the lost two decades: the recovery of zombie firms and entrenchment of reputable firms. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55918-4

    Book  Google Scholar 

  • Nakano M, Nguyen P (2012) Board size and corporate risk taking: further evidence from Japan. Corp Gov Int Rev 20(4):369–387

    Google Scholar 

  • Nettle D (2007) Empathizing and systemizing: what are they, and what do they contribute to our understanding of psychological sex differences? Br J Psychol 98:237–255

    Google Scholar 

  • OECD (2008) Handbook of Constructing Composite Indicator. Methodology and User Guide. http://www.oecd.org/std/42495745.pdf. Accessed 5 Mar 2014.

  • Palvia A, Vähämaa E, Vähämaa S (2015) Are female CEOs and chairwomen more conservative and risk averse? Evidence from the banking industry during the financial crisis. J Bus Ethics 131(3):577–594

    Google Scholar 

  • Powell M, Ansic D (1997) Gender differences in risk behaviour in financial decision-making: an experimental analysis. J Econ Psychol 18(6):605–628

    Google Scholar 

  • Pucheta-Martínez MC, Gallego-Álvarez I (2019) Do board characteristics drive firm performance? An international perspective. RMS. https://doi.org/10.1007/s11846-019-00330-x

    Article  Google Scholar 

  • Rajan R, Zingales L (1995) What do we know about capital structure? Some evidence from international data. J Finance 50(1):1421–1460

    Google Scholar 

  • Salvioni DM, Gennari F, Bosetti L (2016) Sustainability and convergence: the future of corporate governance systems? Sustainability 8(11):1203–1228

    Google Scholar 

  • Sapienza P, Zingales L, Maestripieri D (2008) Gender differences in financial risk aversion and career choices are affected by testosterone. PNAS 106(36):15268–15273. https://doi.org/10.1073/pnas.0907352106

    Article  Google Scholar 

  • Schmitt D, Realo A, Voracek M, Allik J (2008) Why can’t a man be more like a woman? Sex differences in big five personality traits across 55 cultures. J Pers Soc Psychol 94:168–182

    Google Scholar 

  • Selfin Y, Nimmo B (2019) Zombies in our midst. KPMG Economic Insights. https://home.kpmg/content/dam/kpmg/uk/pdf/2019/05/zombie-in-our-midst.pdf

  • Stewart I (2012) Zombie companies. Deloitte Monday Briefing

  • Storz M, Koetter M, Setzer R, Westphal A (2017) Do we want these two to tango? On zombie firms and stressed banks in Europe. ECB working paper, no. 2104, European Central Bank (ECB), Frankfurt. https://doi.org/10.2866/020370

  • Ting IWK, Azizan NAB, Kweh QL (2015) Upper echelon theory revisited: the relationship between CEO personal characteristics and financial leverage decision. Procedia Soc Behav Sci 195(3):686–694

    Google Scholar 

  • Urionabarrenetxea S, San-Jose L, Retolaza JL (2016) Negative equity companies in Europe: theory and evidence. Bus Theory Pract 17(4):307–316

    Google Scholar 

  • Urionabarrenetxea S, Garcia-Merino D, San-Jose L, Retolaza JL (2018) Living with zombie companies: do we know where the threat lies? Eur Manag J 36:408–420

    Google Scholar 

  • Vander H, Willekens M (2008) Disclosure on corporate governance in the European Union. Corp Gov Int Rev 16(2):101–115

    Google Scholar 

  • Wartick SL, Cochran PL (1985) “The evolution of the corporate social performance model. Acad Manag Rev 10(4):758–769

    Google Scholar 

  • Yermack D (2004) Remuneration, retention, and reputation incentives for outside directors. J Financ 59(5):2281–2308

    Google Scholar 

Download references

Funding

This work was supported by UPV/EHU ECRI (PPGA20/13) and FESIDE BOPV2020.

Author information

Authors and Affiliations

  1. Institute of Applied Business Economics, University of the Basque Country (UPV/EHU), Lehendakari Aguirre, 83, 48015, Bilbao, Spain

    Leire San-Jose

  2. Department of Financial Economics, University of the Basque Country (UPV/EHU), Lehendakari Aguirre, 83, 48015, Bilbao, Spain

    Sara Urionabarrenetxea

  3. Department of Financial Economics, University of the Basque Country (UPV/EHU), Lehendakari Aguirre, 83, 48015, Bilbao, Spain

    Jose-Domingo García-Merino

Authors
  1. Leire San-Jose
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Sara Urionabarrenetxea
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Jose-Domingo García-Merino
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Jose-Domingo García-Merino.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Supplementary Information

Appendix

Appendix

See Tables 5, 6, 7, 8, 9, 10 and 11.

Table 5 Descriptive analysis of variables
Full size table
Table 6 Factor loadings and descriptive statistics
Full size table
Table 7 Internal validity measures
Full size table
Table 8 Frequencies and number of cases
Full size table
Table 9 Frequencies of non-zombies and zombies in 2018
Full size table
Table 10 Univariate analysis
Full size table
Table 11 Frequency analysis of significant variables
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

San-Jose, L., Urionabarrenetxea, S. & García-Merino, JD. Zombie firms and corporate governance: What room for maneuver do companies have to avoid becoming zombies?. Rev Manag Sci 16, 835–862 (2022). https://doi.org/10.1007/s11846-021-00462-z

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11846-021-00462-z

Keywords

JEL Classification

Search

Navigation