What are zombie companies?
Companies in a financial rut are stuck, just barely covering their costs with their income. They can’t pay off their debts and are stuck in a loop of borrowing just to make interest payments. This lack of extra money hinders their ability to invest in growing the business. These struggling companies, also nicknamed "zombie companies" or "zombie stocks," are on shaky ground. A minor setback, like a market disruption or a bad quarter, could push them toward bankruptcy or force them to seek a bailout. Banks are essentially their lifeline, as these companies rely heavily on borrowing to stay afloat.
External Risks to Zombie Companies
Zombie companies can continue their operations and services until external changes occur. A sudden shift in the business environment, economic fluctuations, or the emergence of a new competitor in the same industry can cause these zombie companies to fail. Unable to invest or adapt, zombie companies will see their products fall out of favor. Additionally, rising interest rates, which are often a consequence of a strong economy, become a death knell for these debt-laden firms. The higher cost of borrowing makes it impossible for them to keep servicing their debt, pushing them closer to collapse.
Effects of Zombie Companies on the Economy
Zombie companies block productive growth because weak firms stay alive, lowering overall productivity. Economists say these companies hurt society by taking up market share and using talent ("scarce resources") that should go to more successful businesses.
Without money to reinvest, zombie companies can't grow and stay inefficient. These "uncompetitive survivors" reduce productivity in the global economy.
Even though they hurt the economy, some zombie companies are important. For example, the government might bail out a zombie company that employs many people to avoid the huge job losses and social problems that would happen if it went bankrupt.