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When labor protection hurts to help: Evidence from zombie firm exits

Year: 2025

Type: article

Abstract: This study exploits increases in the stringency of the employment protection legislation (EPL) index as a quasi-exogenous shock to examine the causal effect of labor market regulations on the prevalence of zombie firms. Stricter EPL restricts layoffs, thereby reducing the probability of recovery and indirectly weakening creditors’ incentives to gamble on firm revival. Moreover, EPL reforms accelerate the market exit of zombie firms. Following these reforms, zombie firms are also more likely to engage in fixed asset sales rather than workforce reductions as a restructuring strategy.

Source: Finance research letters

DOI: 10.1016/j.frl.2025.108930

Authors: Yongcuo Zhaxi, Yukihiro Yasuda

Institution: Hitotsubashi University

Language: English

Topic: Corporate Insolvency and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDGs: Decent work and economic growth, Peace, justice, and strong institutions

Open Access status: hybrid

Estimated APC paid: $3,730