Fiscal Deposits, Bank Competition and the Formation of Zombie Firms
LIU Chong, ZHOU Feng, LIU Liya, WEN Mengyao, PANG Yuanchen
School of Finance, Shanghai University of Finance and Economics;
Shanghai Institute of International Finance and Economics;
School of Economics, Zhejiang University;
Hundsun Technologies Inc
Summary:
At the beginning of 2018, six ministries and commissions, including the National Development and Reform Commission, required the disposal of zombie firms to resolve excess capacity. Further research on the internal formation mechanism of zombie firms and its removal is important for promoting the development of the real economy. What is the root cause of Chinese zombie firms？ Studies have found that zombie firms are created when banks cover up non-performing loans or government management. However, Chinese banks do not issue zombie credit to intentionally cover up non-performing loans. What is the mechanism that motivates commercial banks to issue zombie credit, external pressure or internal economic motives？ This paper analyzes the mechanism behind zombie firms, focusing on the effect of local fiscal deposits on bank credit distribution. This paper constructs a theoretical model to analyze the mechanism behind the formation of Chinese zombie firms. The model shows that local fiscal deposits contribute to firms zombification by affecting bank credit allocation, resulting in over-investment by firms and less efficient business operations. This study uses the China Banking Regulatory Commission's website to acquire commercial bank branches' financial license data. The commercial bank's name, approved date of establishment, and other information are used to create provincial-level banking competition indicators. The theoretical hypothesis is tested empirically with data on fiscal deposits and China's industrial firms from 2005 to 2013. The study found that greater proportions of fiscal deposits in local deposits increase the probability of firms zombification. The study also found that bank competition promotes firms zombification. The government's ability to negotiate with banks increases as the competition between regional banks increases. The banks affect the allocation of credit resources and accelerate firms zombification by competing over fiscal depositions. The study's mechanism test shows that fiscal deposits' credit distribution effect promotes over-investment in some firms. The over-investment results in worse operating performance, increasing the probability of firms zombification. The banks' competition intensifies the effect. Local governments are more inclined to influence bank credit decisions through fiscal deposits in areas with a low degree of marketization. The degree of competition among banks has a weak relationship with the zombification of large firms and state-owned firms. The degree of competition has a strong relationship with the zombification of small or non-state-owned firms that are often subject to credit discrimination. The banks begin to win over small or non-state-owned firms as the banks' competition intensifies, increasing the probability of the firms' zombification. This paper provides two policy implications based on its empirical findings. First, the removal and prevention of zombie firms will require fewer government subsidies for inefficient firms, regulations for local fiscal deposit management, improvements to the fiscal deposit bidding system, and more efficient allocation of fiscal deposits. Second, the supervisory authority must take appropriate measures to guide banks toward reasonable competition, encourage local banks to expand financing channels, and jointly improve economic efficiency and high-quality economic development. The paper offers the following contributions. First, this paper advances the literature on fiscal deposits by analyzing their role in firms zombification; second, this paper shows that bank competition intensifies zombification; finally, the findings are significant for the governance of zombie firms. The management of fiscal deposit accounts should be standardized when cleaning up zombie firms.
刘冲, 周峰, 刘莉亚, 温梦瑶, 庞元晨. 财政存款、银行竞争与僵尸企业形成[J]. 金融研究, 2020, 485(11): 113-132.
LIU Chong, ZHOU Feng, LIU Liya, WEN Mengyao, PANG Yuanchen. Fiscal Deposits, Bank Competition and the Formation of Zombie Firms. Journal of Financial Research, 2020, 485(11): 113-132.
Andrews, D., and F. Petroulakis, 2019, “Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe”, ECB Working Paper No.2240.
[25]
Acharya, V.V., T. Eisert., C. Eufinger, and C. W. Hirsch, 2019, “Whatever It Takes: The Real Effects of Unconventional Monetary Policy”, Review of Financial Studies,32(9): 3366～3411.
[26]
Blattner, L., L. Farinha, and F. Rebelo, 2019, “When Losses Turn into Loans: the Cost of Undercapitalized Banks”, ECB Working Paper No. 2228.
[27]
Brandt, L., J. Van Biesebroeck, and Y. Zhang, 2012, “Creative Accounting or Creative Destruction？ Firm-level Productivity Growth in Chinese Manufacturing”, Journal of Development Economics, 97(2): 339～351.
[28]
Bruche, M., and G. Llobet, 2014, “Preventing Zombie Lending”, The Review of Financial Studies, 27(3):923～956.
[29]
Caballero, R J., T. Hoshi, and A.K. Kashyap, 2008, “Zombie Lending and Depressed Restructuring in Japan”, American Economic Review, 98(5):1943～1977.
[30]
Calderon, C., and K. Schaeck, 2016, “The Effects of Government Interventions in the Financial Sector on Banking Competition and the Evolution of Zombie banks”, Journal of Financial and Quantitative Analysis, 51(4): 1391～1436.
[31]
Fukuda, S., and J. Nakamura, 2011, “Why Did ‘Zombie' Firms Recover in Japan？”, World Economy, 34(7), 1124～1137.
[32]
Gao, H., H. Ru., R. Townsend, and X. Yang, 2019, “Rise of Bank Competition: Evidence from Banking Deregulation in China”, NBER Working Paper No. 25795.
[33]
Hoshi, T., and A. K. Kashyap, 2010, “Will the US Bank Recapitalization Succeed？ Eight Lessons from Japan”, Journal of Financial Economics, 97(3): 398～417.
[34]
Imai, K., 2016, “A Panel Study of Zombie SMEs in Japan: Identification, Borrowing and Investment Behavior”, Journal of the Japanese and International Economies, 39: 91～107.
[35]
Jaskowski, M., 2015, “Should Zombie Lending Always Be Prevented”, International Review of Economics & Finance, 40(11):191～203.
[36]
Kwon, H., U., F. Narita, and M. Narita, 2015, “Resource Reallocation and Zombie Lending in Japan in the 1990s”, Review of Economic Dynamics, 18(4):709～732.
[37]
Meza, D.D., and D.C. Webb, 1987, “Too Much Investment: A Problem of Asymmetric Information”, Quarterly Journal of Economics, 102(2):281～292.
[38]
Peek, J., and E.S. Rosengren, 2005, “Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan”, American Economic Review, 95(4):1144～1166.
[39]
Rice, T., and P.E. Strahan, 2010, “Does Credit Competition Affect Small-firm Finance？”, The Journal of Finance, 65(3): 861～889.
[40]
Richardson, S., 2006, “Over-investment of Free Cash Flow”, Review of Accounting Studies, 11(2-3): 159～189.
[41]
Tanaka, T.,2006, “A Lost Decade Revisited: Zombie Firms and Inefficient Labor Allocation”, Discussion Papers in Economics & Business 06-08, Osaka University, Graduate School of Economics.
