zombie company

DEFINITION: The term “zombie company” refers to a business firm that generate barely sufficient revenue to sustain its operations and meet its debt obligations but lacks the wherewithal ever to pay off its debts completely.

Since zombie companies are barely able to cover essential expenses, such as rent, wages, and debt service, they do not have any extra funds left over for investment.

Therefore, they have no ability to expand the company’s operations, other than by borrowing money. Indeed, zombie companies rely heavily on banks for financial support. Although banks are essentially lifelines for zombie companies, the down side is that zombies  are likely to face elevated borrowing costs.

In any case, zombie companies are vulnerable to potential crises, such as market disruptions or periods of weak performance, which could push them toward insolvency.

Zombie companies are also known as “the living dead” and, if publicly traded, their shares may be termed “zombie stocks.”

ETYMOLOGY: The phrase “zombie company” was coined in Japan during the 1990s—a period sometimes referred to as the “lost decade,” which was marked by the bursting of a massive asset price bubble in that country’s financial sector.

The English word “zombie” is attested from the mid-nineteenth century. It most likely derives, via Haitian Creole, from a language of the Bantu family. For example, it is akin to the Kikongo word nzambi, meaning “god.”

The English noun “company” is attested from the thirteenth century. It derives, via Middle English companie, from Old French compagnie, which is formed from compain, meaning “companion.” The latter word derives from Late Latin companio with the same meaning.

USAGE: Not infrequently, zombie enterprises experience setbacks or ultimately go bankrupt due to the substantial expenses involved in debt service or in other activities necessary in some business sectors, such as research and development.

Zombie companies may face limitations in terms of funds for capital infusion that would enable investment with a view to expansion.

If a zombie company is so large that its collapse might have widespread adverse repercussions throughout the economy, causing political embarrassment for the government of the day, then it may be considered “too big to fail” and the government may step in to save it. This was the case with some of the institutions that were bailed out during the 2008 financial crisis.

Since it may be safely assumed that many zombie companies will have difficulty in meeting their financial obligations, such firms may come to be regarded as risky prospects for investment. This assessment may, in turn, lead to downward pressure on a zombie company’s stock price.

In the middle of a financial crisis, politicians feel immense pressure to “do something,” which accounts in part for bailouts to keep afloat companies that may be too large or otherwise ineffective and struggling. Most economists maintain that it would have been more beneficial for the economy as a whole if such underperforming companies had been allowed to fail.

It was in this context that the phrase “zombie company” resurfaced in 2008—this time in the US, in response to the federal bailout payments to the failing companies that came to be bundled together in the form of the Troubled Asset Relief Program (TARP).

Although the risk to the US economy from zombie companies is thought to remain low, their numbers have been augmented by years of lenient monetary measures such as extensive borrowing, historically rock-bottom (zero bound) interest rates, and quantitative easing (QE).

Economists contend that these policies preserve inefficiencies while impeding innovation. productivity, and growth. In future, under different market conditions, it is likely that zombie companies will find it increasingly challenging to fulfill their fundamental obligations due to rising interest rates and the mounting cost of servicing their debts.

For this reason, zombie companies will likely be among the earliest casualties of any downturn in the market or change in monetary policy in the direction of a more restrictions.

On the other hand, if current market conditions and government policies continue, solid and thriving enterprises might experience unwarranted restrictions on their credit opportunities and so might not weather an economic downturn as well as they otherwise would.