The Investigation of Zombie Firms’ Existence in Borsa İstanbul Manufacturing Industry

Abstract

Introduction: The word “zombie” is associated with the “living dead” in our minds from horror movies we watch on TV. Recently, this concept has been used frequently to identify the firms that are still standing while they should have been closed long ago. Zombie firms are apparently active, but their cash flows are only used to compensate interest expense of their debts. Banks prefer to re-finance these firms and restructure their sunken loans rather than following their debts and moving them out of the bank’s balance sheets. However, these inefficient and unproductive firms also consume the capital that can be transferred to more productive firms. Therefore, these firms live as long as the cash inflow, which is considered as fresh blood and meat for the living dead-zombie, and they consume the resources of other living healthy firms.

Purpose: The aim of this study is to investigate the existence of zombie firms which are listed in Borsa İstanbul manufacturing industry.

Methodology: The research period is between the years 2008 and 2018, and interest coverage ratio (ICR) is used for Borsa İstanbul manufacturing firms. There are several explanations of zombie firms in the literature, which are commonly constructed on a scope of profitability of a firm. In this research, the OECD’s preferred explanation and classification of zombies is chosen which describes a zombie firm as having an ICR (operating earnings to interest expenses) which is less than 1 over three consecutive years.

Findings: It has been noted from this research that ICRs differ in the research period of Borsa İstanbul manufacturing industry firms. About 62 of 109 firms traded on Borsa İstanbul manufacturing industry between 2008 and 2018 were classified as zombie firms because they had ICRs below one for three consecutive years or over.

Citation

Kaplanoğlu, E. and Yükçü, C. (2020), "The Investigation of Zombie Firms’ Existence in Borsa İstanbul Manufacturing Industry", Özen, E. and Grima, S. (Ed.) Uncertainty and Challenges in Contemporary Economic Behaviour (Emerald Studies in Finance, Insurance, and Risk Management), Emerald Publishing Limited, Leeds, pp. 37-48. https://doi.org/10.1108/978-1-80043-095-220201004