Zombies, Insolvency Reform, and Misallocation of Capital

<jats:p>This study shows that insolvency reforms in economies with a high prevalence of distressed and zombie firms lead to more efficient allocation of capital. Using firm-level data from 22 economies (2003–2024), the study finds significant reductions in scale misallocation, mirroring higher recovery rates and shorter insolvency durations, yielding a 3.5% productivity gain within 5 years of the reform. Reforms curb debt and increase borrowing costs for distressed firms, while previously credit-constrained firms gain improved access to funding and investment opportunities.</jats:p>