Abstract:

We show how the threat of “uncertainty-induced zombification”—creditors’ willingness to keep
their distressed borrowers alive when faced with uncertainty—shapes various industry dynamics.
Under a real options framework, we demonstrate that unlevered firms become reluctant to invest
and disinvest in anticipation that uncertainty induces creditors to convert defaulting rival firms into
zombies. We validate our theoryusingdynamic, industry-specific estimates of expected uncertainty induced zombification together with loan contract-level data. Empirically, higher uncertainty-led
rival zombification expectations prompt healthy firms to reduce their costly-to-reverse capital
investment and disinvestment, hiring, and establishment-level openings and closures (intensive
and extensivemargins are affected). We confirmthose dynamics using granular, near-universal data
on the asset allocation decisions of global shipping firms. Critically, uncertainty-led zombification
expectations depress healthy firms’ sales, profits, and stock returns. Our results reveal nuanced
effects on creative destruction—while healthy firms’ asset allocation slows down, their innovation
activity accelerates. Our findings highlight a novel channel throughwhich uncertainty shapes firms’
capital accumulation, distorting their real and financial policies and performance.

*Co-authored with M. Campello (Cornell University), G. Kankanhalli (Univesity of Pittsburgh) & K. Schneider (University of Cambridge).

General information:

Attendance to this seminar is possible by invitation only. Please send an e-mail to finsec-abs@uva.nl if your are interested in attending this seminar.