Stagnation was fueled by this circular relationship between struggling banks which kept artificially alive zombie firms that were contributing to degrade the accounts of banks and of competing firms, and preventing a market cleansing process. Such a sequence does not seem to be at work in France. French banks have so far performed well, despite an environment of very low interest rates. In addition, the proportion of firms in difficulty that benefited from particularly low interest rates remained stable, at around 3% over the period 2006-2014. If the presence of zombie firms in France cannot be explained by the presence of zombie banks in the economy, it is necessary to verify the role played by the procedures available to heavily indebted companies. The purpose of this study is twofold. The first aim is to assess to what extent France is affected by the phenomenon of zombies. The second is to measure the effectiveness of the French insolvency regime in preventing the exit of viable firms from the market, and accompanying the market exit of non-viable firms.
Zombies are defined as mature firms (ten years old at least) for which operating income does not cover their interest costs for three consecutive years. From 2013 to 2015, zombies accounted for 5.6% of all mature firms in France. A high proportion of zombies could alter the proper allocation of productive resources, which is one of the main drivers of productivity gains.
The insolvency regime, whose principal role is to clean up the accounts of firms in difficulty, must be able to guide firms experiencing temporary difficulties towards procedures designed to avoid them bankruptcy, and speed up market exit for the zombies.
Based on a large original sample of French firms, drawn from the matching of accounting information and data on insolvency, this note proposes a measure of the effectiveness of insolvency proceedings - turnaround and liquidation, excluding safeguard proceedings - in the selection of zombies to facilitate their market exit.
The analysis leads to nuanced conclusions. On the one hand, only a small proportion of zombies fail: fewer than 7% in the year where they become zombies; 22% after three years. On the other hand, the most troubled zombies go bankrupt, of which more than half became zombies just two years before their failure. This indicates that market selection is at work in France through a relative rapid intervention of insolvency proceedings. The low presence of zombies in the French economy suggests as well that failure procedures are effective. Furthermore, since the early 2000s the growing weight of zombies in the French economy is too modest to have contributed substantially to the productivity slowdown.