Zombie business strategies: The case of Ukraine
Objective: The objective of the article is to study zombie business strategies in Ukrainian practice and present the influence of traditional and manipulative tools on business activity in conditions of weak institutional environment.
Research Design & Methods: We apply linear and logistic regression to estimate the impact of traditional and manipulative tools on the investment possibilities by using data from a sample of small enterprises in Ukraine in 2015-2018. The results of the logistic regression were used to present Nash equilibrium in the payoff matrix to explain the coexistence of traditional and manipulative tools in doing business through the prism of interests of the society as a whole.
Findings: Evidence revealed that the Ukrainian market creates a special type of zombie business resulting from ineffective government policy and unfavourable institutional environment. Moreover, in conditions of weak stock market, this practice could be used not only in Ukraine but also expanded to countries with similar problems. The main problem is the fact that – in the case of searching for the desired level of profitability – Nash equilibrium on the Ukrainian market combines manipulative and traditional tools.
Implications & Recommendations: Considering the business environment that characterized by unprofitability, the equilibrium between adherents of traditional and manipulative mechanisms is reached on the market where the latter prevail. This situation becomes a serious problem for reforms, as fight against manipulative practices by weak market institutions happens almost outside real business. The problem explains why the government and small business practically coexist by interacting only partially without opposition and counteraction. In the case of searching for the desired level of profitability (if the market is in equilibrium), a reformation or transformation of the system will be accompanied by obvious resistance. Our study informs about the risks and economic effects of zombie firms. We recommend the creation of a favourable institutional environment through effective public policies.
Contribution & Value Added: We emphasize the undeniable fact that small business is officially completely unprofitable in Ukraine. The article helps to understand the essence of zombie business. It is one of the first attempts to develop a comprehensive analysis of zombie business by a wide range of manipulative tools of financial statements that apply game theory models.
zombie business; strategy; institutions; Nash equilibrium; Ukraine
Acharya, V.V., & Steffen, S. (2014). Falling short of expectations? Stress-testing the European banking system (CEPS Policy Brief, 315). Retrieved from https://ssrn.com/abstract=2381911 on January 15, 2020.
Ahearne, A.G., & Shinada, N. (2005). Zombie Firms and Economic Stagnation in Japan. International Econom-ics and Economic Policy, 2(4), 363-381. https://doi.org/10.1007/s10368-005-0041-1
Alfaro, L., Asis, G., Chari, A., & Panizza, U. (2017). Lessons Unlearned? Corporate Debt in Emerging Markets. Cambridge: Harvard University.
Banerjee, R., & Hofmann, B. (2018). The rise of zombie firms: causes and consequences. BIS Quarterly Re-view, 67-78. Retrieved from https://www.bis.org/publ/qtrpdf/r_qt1809g.pdf on February 12, 2020.
Berger, A., & Bouwman, C.H.S. (2013). How Does Capital Affect Bank Performance During Financial Crises?. Journal of Financial Economics, 109(1), 146-176. https://doi.org/10.1016/j.jfineco.2013.02.008
Bilan, Y., Vasylieva, T., Lyeonov, S., & Tiutiunyk, I. (2019). Shadow Economy and its Impact on Demand at the Investment Market of the Country. Entrepreneurial Business and Economics Review, 7(2), 27-43. https://doi.org/10.15678/EBER.2019.070202
Bilotkach, V. (2006). A Tax Evasion – Bribery Game: Experimental Evidence from Ukraine. The European Jour-nal of Comparative Economics, 3(1), 31-49. https://doi.org/10.2139/ssrn.807004
Bush, S. (2018). Zombie Banks and Bank Bailouts. Retrieved from https://owlcation.com/social-sciences/Do-Zombie-Banks-Really-Exist on February 27, 2020.
Caballero, R.J., Hoshi, T., & Kashyap, A.K. (2008). Zombie Lending and Depressed Restructuring in Japan. American Economic Review, 98(5), 1943-77. https://doi.org/10.1257/aer.98.5.1943
Deari, F., Matsuk, Z., & Lakshina, V. (2019). Leverage and Macroeconomic determinants: evidence from Ukraine. Studies in Business and Economics, 14(2), 5-19. https://doi.org/10.2478/sbe-2019-0021
Dorożyński, T., Dobrowolska, B., & Kuna-Marszałek, A. (2020). Institutional Quality in Central and East Euro-pean Countries and Its Impact on FDI Inflow. Entrepreneurial Business and Economics Review, 8(1), 91-110. https://doi.org/10.15678/EBER.2020.080105
Fukuda, S., & Nakamura, J. (2010). Why Did ‘Zombie’Firms Recover in Japan? (CARF Working Papers, 224). Retrieved from https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/234.pdf on April 17, 2020.
Google Books Ngram Viewer. Retrieved from https://books.google.com/ngrams on January 8, 2020.
Goto, Y., & Wilbur, S. (2019). Unfinished business: Zombie firms among SME in Japan’s lost decades. Japan and the World Economy, 49. https://doi.org/10.1016/j.japwor.2018.09.007
Henselmann, K., Ditter, D., & Lupp, P. (2016). The effects of the financial crisis on cooperative banks in Europe – A critical comparison (Working Papers in Accounting Valuation Auditing, 2016-1). Nürnberg: Friedrich-Alexander-Universität ErlangenNürnberg.
Kanaya, A., & Woo, D. (2000). The Japanese banking crisis of the 1990s: sources and lessons for Japan. Jour-nal of Financial Economics, 97(3), 398-417.
Kawai, M. (2005). Reform of the Japanese banking system. International Economics and European Policy, 2(4), 307-335. https://doi.org/10.1007/s10368-005-0039-8
Kyselova, T. (2015). The Role of State in Ukrainian Business: Violent Bespredel and Profitable Partner. Kyiv Mohyla Law & Politics Journal, 1, 83-112. https://doi.org/10.18523/kmlpj52658.2015-1.83-112
Lacalle, D. (2017). The Rise of Zombie Companies – And Why It Matters. Retrieved from Misses Institute: https://mises.org/library/ on January 7, 2020.
Männasoo, K., Maripuu, P., & Hazak, A. (2017). Investments, Credit, and Corporate Financial Distress: Evi-dence from Central and Eastern Europe. Emerging Markets Finance and Trade, 54(3), 677-689. https://doi.org/10.1080/1540 496X.2017.1300092
McGowan, M.A., Andrews, D., & Millot, V. (2017). The walking dead: zombie firms and productivity perfor-mance in OECD countries (OECD Working Papers, 1372). https://doi.org/10.1787/180d80ad-en
Molina, C.A. (2005). Are Firms Underleveraged? An Examination of the Effect of Leverage on Default Proba-bilities. The Journal of Finance, 60(3), 1427-1459.
Mora, M. (2017). Dealing with non-performing loans. European versus Czech Perspective. Financial Stability Seminar, 11th Edition, Bucharest.
Nakaso, H. (2001). The financial crisis in Japan during the 1990s: how the bank of Japan responded and lessons learn (BIS Papers, 6). Retrieved from https://www.bis.org/publ/bppdf/bispap06.htm on February 12, 2020.
Novita, S., Tjahjadi, B., & Irwanto, A. (2018). Industry and Financial Crises in Fragile and Zombie Firms: Does Leverage Matter?. Journal of Business and Economics Review, 3(3), 51-58.
Olaniyi, T.A., Elelu, M.O., & Abdulsalam, T.S. (2015). Impact of Capital Structure on Corporate Performance: A Pre and Post Crisis Evaluation of Selected Companies in US. International Journal of Accounting Re-search, 2(8), 1-20.
Osório de Barros, G., Bento Caires, F., & Xarepe Pereira, D. (2017). Zombie Companies in Portugal – The non-tradable sectors of Construction and Services (GEE Papers, 88). Retrieved from http://www.oecd.org/global-forum-productivity/library/GEE_PAPER_88.pdf on December 24, 2019.
Radivojevic, N., & Jovovic, J. (2017). Examining of determinants of non-performing loans. Prague Economic Papers, 26(3), 300-316. https://doi.org/10.18267/j.pep.615
Schivardi, F., Sette, E., & Tabellini, G. (2017). Credit misallocation during the European financial crisis (BIS Working Papers, 669). Retrieved from https://www.bis.org/publ/work669.pdf on April 18, 2020.
Schnabl, G. (2013). The macroeconomic policy challenges of balance sheet recession: lessons from Japan for European crisis (CESifo Working Paper, 4249). Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2274638 on December 15, 2020.
Schoenmaker, D., & Peek, T. (2014). The state of banking sector in Europe (OECD Working Papers, 1102). https://doi.org/10.1787/18151973
Smallbone, D., Welter, F., Voytovich, A., & Egorov, I. (2010). Government and entrepreneurship in transition economies: the case of small firms in business services in Ukraine. The Service Industries Journal, 30(5), 655-670. https://doi.org/10.1080/02642060802253876
State Statistic Service of Ukraine. (2019). Retrieved from http://www.ukrstat.gov.ua/ on January 17, 2019.
Stock market infrastructure development agency of Ukraine, Data Base. (2019). Retrieved from https://smida.gov.ua/db/emitent on December 3, 2019.
Storz, M., Koetter, M., Setzer, R., & Westphal, A. (2017). Do we want these two to tango? On zombie firms and stressed banks in Europe (ECB Working Paper Series, 2104). Retrieved from https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2104.en.pdf on January 4, 2020.
Tiffin, A. (2006). Ukraine: the cost of weak institutions (IMF Working Paper, WP/06/167). Retrieved from https://www.imf.org/external/pubs/ft/wp/2006/wp06167.pdf on May 10, 2020.
Urionabarrenetxea, S., Garcia-Merino, J.D., San-Jose, L., & Retolaza, J.L. (2018). Living with Zombie Compa-nies: Do We Know Where the Threat Lies?. European Management Journal, 36(3), 408-420. https://doi.org/10.1016/j.emj.2017.05.005
Willam, D. (2015). Zombie banks and forbearance lending: causes, effects, and policy measures. (disserta-tion). Cologne: Leipzig University.
World Bank Group (2019). Doing business 2020, Economy profile of Ukraine. Retrieved from https://www.doingbusiness.org/content/dam/doingBusiness/country/u/ukr aine/UKR.pdf on January 12, 2020.
World Bank, Data Catalog, Doing Business. Retrieved from https://datacatalog.worldbank.org/dataset/doing-business on December 28, 2019.
This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.
Authors who publish with this journal agree to the following terms:
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a CC BY-ND licence that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are asked to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) only the final version of the article, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access). We advise using any of the following research society portals: