State ownership and zombie firms: Evidence from China's 2008 stimulus plan

Whether and how are zombie firms associated with a crisis-rescue plan? We examine this issue through the channel of state-owned enterprises (SOEs). We find that, after China's 2008 stimulus plan, a firm in the city with a high SOE share is more likely to become a zombie firm. This result may be driven by the fact that government-led investment, through SOEs, tends to focus more on employment-related projects than efficient ones, particularly during the crisis period. Resource misallocation associated with the crisis-rescue plan may cause production inefficiency, which leads to the emergence of zombie firms.