[News Terms] The Origin of 'Zombie Companies' Holding Back the Domestic Stock Market

Companies Receiving Financial Support Due to Japan's Bubble Economy Collapse
South Korea's Three Consecutive Years of Interest Coverage Ratio Below 1 for Marginal Companies
Identified as the Main Cause Hindering Dynamism in South Korea's Stock Market

Financial authorities have begun revising the delisting requirements for stock exchanges. On the 23rd, the Financial Services Commission announced that it is reviewing improvement measures for the delisting system in collaboration with related organizations such as the Financial Supervisory Service and the Korea Exchange. The plan is to accelerate the swift removal of 'zombie companies' from the stock market to protect investors and resolve the undervaluation of the Korean stock market.

The term 'zombie company' refers to Japanese insolvent companies that received financial support from Japanese banks after the collapse of Japan's bubble economy in the 1990s, likened to the English word 'zombie,' meaning 'the undead.' For example, the British daily newspaper The Guardian described the Japanese retail company 'Daiei' as a zombie company in its November 20, 2002 article titled 'Japan's Zombie Economy? Don't Buy, Just Watch.'

[Photo by AI Image]

This term has no official definition. In an OECD research report (Adalet McGowan, 2017), zombie companies are defined as firms that have persistent difficulties in paying interest over a long period. In an academic paper titled 'Zombie Lending and Restructuring in Japan,' presented by Professor Caballero of MIT and two others at the 2008 American Economic Association, 'unprofitable borrowers' were referred to as zombie companies. The paper analyzed that expanded financial support for insolvent companies negatively impacts the overall Japanese economy.

In Korea, 'marginal companies' are generally treated as zombie companies. Marginal companies are defined as firms with an interest coverage ratio below 1 for three consecutive years and with a business history of over 10 years. The interest coverage ratio is calculated by dividing operating profit by interest expenses. If the interest coverage ratio is below 1, the company is considered a potential insolvent firm that cannot even cover interest expenses with operating profit.

The number of marginal companies in Korea continued to rise due to the spread of COVID-19 in 2020. According to the 'Financial Stability Report as of September 2024' released by the Bank of Korea on the 26th of last month, marginal companies accounted for 16.4% of all externally audited companies by number at the end of last year. This is an increase of 1.9 percentage points compared to 2022. By company size, small and medium-sized enterprises (17.4%) had a higher proportion than large corporations (12.5%).

Lee Bok-hyun, Governor of the Financial Supervisory Service, is delivering a greeting at the open forum for the advancement of the capital market held on the 12th of last month at the FKI Tower Conference Center in Yeouido, Seoul.
[Photo by Yonhap News]

Zombie companies are identified as the main culprit hindering the dynamism of the domestic stock market. If credit supply continues to zombie companies, which are unlikely to recover as normal companies in the future, without swift restructuring, problems may arise in the asset soundness of financial institutions. If zombie companies are not removed according to market principles and only consume government or creditor support funds, the support funds for companies that truly need help will decrease, adversely affecting the overall economy.

On the 12th of last month, Lee Bok-hyun, Governor of the Financial Supervisory Service, stated at the 'Open Forum for Capital Market Advancement' held by the Korea Economic Research Institute, "Zombie companies can act as a limiting factor for value appreciation within the capital market, so they need to be swiftly removed," adding, "We are currently discussing improvement measures for the entire system, including shortening the delisting process and strengthening listing maintenance requirements, with the relevant ministries."