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  • Article
  • AEA Papers and Proceedings

Weak Corporate Insolvency Rules: The Missing Driver of Zombie Lending

By: Bo Becker and Victoria Ivashina
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Abstract

"Zombie lending"—lending to less-productive firms at subsidized rates—can help banks with misaligned incentives in the short run, but it prolongs economic downturns. We propose that inefficient resolution of insolvency is a significant contributor to this problem. We exploit variation in the efficiency of insolvency across countries to show that lack of formal bankruptcies, cheap (zombie) credit, and stickiness of existing creditors is more common in bad economic periods when insolvency works less well.

Keywords

Zombie Credit; Insolvency and Bankruptcy; Financing and Loans; Economic Slowdown and Stagnation

Citation

Becker, Bo, and Victoria Ivashina. "Weak Corporate Insolvency Rules: The Missing Driver of Zombie Lending." AEA Papers and Proceedings 112 (May 2022): 516–520.

About The Author

Victoria Ivashina

Finance
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