Zombie Firms and Productivity: An Analysis Based on Tax Data

Overview & Synopsis

This paper studies zombie firms in France, businesses whose profits are insufficient to cover interest payments, over 2009–2023, with particular attention to the COVID-19 period and its aftermath. Using exhaustive firm-level tax data (2009–2023) and Country-by-Country Reporting data (2016–2023), the analysis adjusts profits for large multinationals using a recent methodology from the tax avoidance literature. Traditional approaches significantly overestimate zombie prevalence among these firms, with corrections reducing the employmentweighted share by up to 10 percentage points. Across the full economy, zombie firms account for 8% of employment and 3.7% of firms, with lower prevalence among SMEs. Following the pandemic, the zombie share rose temporarily, peaking at 9% in 2022. The bankruptcy penalty for zombies collapsed in 2020, then began a gradual recovery; as of the period ending in 2023 it had not fully normalized. The paper then examines how the presence of zombie firms affects the economy through misallocation channels—asking whether they impede reallocation among healthy firms and weaken creative destruction. We find that industries with a higher zombie share are associated with reduced firm entry and weaker market selection (fewer exits of low-productivity firms), with limited direct crowding-out of healthy firms.