A panel study of zombie SMEs in Japan: Identification, borrowing and investment behavior

• Many zombie firms existed among SMEs, especially among very small firms capitalized at less than 10 million yen.
• Zombie SMEs could not reduce their loans.
• Land values did not affect borrowing among zombie firms.
• Evergreening received by zombie firms increased inefficient investment.

Utilizing a panel dataset of firms for the period 1999–2008, we estimated the prevalence of zombies among Japanese Small- and Medium-sized enterprises (SMEs) and their borrowing and investment behaviors. We observe that 4–13% of SMEs were zombie firms during the period 1999–2008. The estimation of the borrowing function reveals that SME zombie firms did not change their loans in response to a change in land values due to evergreening. We also observe that the profitability of investment, measured by marginal q, did not have positive effects on investments of zombie firms. This indicates that investment increase resulting from evergreen loans was not necessarily productive or profitable.