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The Zombie Apocalypse with Dr. Edward Altman
Sep 11, 2024
Dr. Edward Altman, a renowned financial metrics researcher and creator of the Altman Z-Score, dives into the intriguing world of zombie companies—organizations that persist despite financial distress. He discusses how these firms misallocate resources, impede competition, and contribute to economic stagnation. With examples like Alitalia, Altman highlights the impact of government policies and interest rate subsidies that keep these non-viable entities afloat. The emergence of zombie companies in countries like Australia and Canada further emphasizes the global reach of this troubling trend.
27:45
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Quick takeaways
- Zombie companies, defined by low Z-scores and difficulty meeting interest payments, pose significant risks to economic productivity and resource allocation.
- The existence of developed leverage finance markets allows insolvent firms to persist, leading to inefficient capital allocation and broader economic challenges.
Deep dives
Defining Zombie Companies
Zombie companies are generally defined as firms that are insolvent yet continue to operate over extended periods, typically three to five years. A standard definition includes companies that struggle to meet their interest obligations, indicated by an interest coverage ratio below one. However, recent research suggests that this definition might be too broad, as it could include over 20% of listed companies in the U.S. Instead, a more refined definition combines this ratio with a Z-score indicating a high probability of default, resulting in a smaller ratio of zombie companies, approximately 8% in the U.S.
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