Judicial efficiency and the default of zombie firms

tommaso oliviero (Federico II)

Abstract

Using a large sample of enterprises in the EU-27, we study the determinants of corporate defaults in the period 2007-2018 and find that, among other factors, their default probability is significantly larger when they experience in the previous year negative end-of-the year equity, that is the result of profound financial distress (zombie firm). We document that zombie firms are more likely to default one-year ahead in countries with more efficient judicial insolvency procedures. To establish a causal link between judicial efficiency and default probability of zombie firms, we exploit a reform of the court districts in Italy in 2013 that generates exogenous variation in trial lengths. Our findings corroborates the hypothesis that there exists a cleansing effect of judicial efficiency that limits the persistence of zombie firms in the economy.

Download the file