First of all, you should know what Zombies are and only then one can understand what it teaches about finance. This is nothing but enabling enterprises to just manage with existing money for operations, as well as, servicing of debt only due to higher borrowing costs. This means that such firms will not be in a position to repay their debt. Also, this will mean that they cannot make any investment to stimulate growth. Such a precarious situation could pose an insolvency threat any time, i.e., if any single quarter turns out to be a poor one.
Depends On Banks
Therefore, Zombies are highly dependent on financial institutions like banks for its financing. This can be termed as a type of life support to such enterprises. Alternatively, Zombies firms are called the “zombie stocks” or “living dead.” This demonstrated how dangerous to follow this type for financing.
One of the key factors is that it could often fail. Similarly, Zombies could also lead to increased costs for falling victims in respect of a debt or some operations that included research and development. Also, in this type, there could be the absence of capital investment resources that are required to create growth perspectives.
Another biggest headache of Zombies is that if any of those companies employed a large number of people, then it invites trouble too. That is because any failure would mean that it will be raked up as a big political issue and viewed as “too big to fail.”
There is a strong feeling among a number of analysts that Zombies enterprises will find it tough to reach their financial obligations. This will mean that those companies are branded as risky one for investments. As a result, such enterprises shares price could face suppression from the market forces.
It was in the 1990s that Japan has to refer Zombies to enterprises for the first time during its “Lost Decade.” This has happened after the asset price bubble. During this period, enterprises were largely dependent on banks so that they could keep their operations get going. This is despite the fact that they knew very well that they were failing, inefficient and bloated.
On top of these, economists do not favor offering any bailout packages to such poorly managed companies, and they want them to fail for the economy to be better. Interestingly, it was in 2008 that the term Zombies came into being following the American government’s bailout packages that covered even big firms like General Motors, American International Group, and Citibank.
Economists are not at all interested in Zombie companies that are on life support though it might preserve jobs. They believe that using resources will lead to growth obstruction of even successful enterprises and termed it as a misguided one.
Zombie companies are facing higher risks since any shift in the market will mean that they are going to be the first victims. That is because it could not meet even their basic requirements since increasing interest rates will drive their debt to be a highly expensive one for service.