Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/252145 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 9628
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
An entrepreneur chooses a relationship bank or market finance. The advantage of bank finance is that the quality of the entrepreneur's project is identified early, allowing to liquidate low-quality projects. The loan contract induces an efficient continuation decision if the entrepreneur has sufficient wealth. If the entrepreneur is cash constrained, the loan contract is such that the bank continues inefficient projects, i.e., zombie lending occurs. In the short run - for a given contract - a drop in the market interest rate increases zombification. The bank adapts the contract to this drop in the long run, and zombification diminishes.
Subjects: 
evergreening
interest rates
relationship banking
Zombie firms
JEL: 
D82
D86
G21
G33
Document Type: 
Working Paper
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