Living Dead or Just Illiquid? Valuing Zombie Firms in Africa's Thin Financial Markets

ABSTRACT This study investigates the effect of zombie firm status on market valuation and explores firm‐specific and macroeconomic determinants of zombification in Sub‐Saharan Africa. Despite growing concern over zombie firms globally, there is limited empirical evidence from Africa. The study fills this gap by examining zombification within institutional and data constraints unique to emerging African economies. Drawing on 2210 firm‐year observations from Nigeria, Kenya, and South Africa (2013–2022), the study applies the fixed‐effects logistic and probit regression models. Zombie firms are identified using a dual‐indicator framework, persistent unprofitability and rising leverage, adapted from Fukuda and Nakamura (2011) for data‐scarce environments. Zombie firms experience significantly lower market valuations, supporting market efficiency theories. Financial distress and short‐term debt usage are strong predictors of zombification, while macroeconomic instability, especially inflation and interest rates, exacerbates the phenomenon. Country‐specific variations reflect institutional differences in governance and credit enforcement. Findings highlight the urgent need for reforms in bankruptcy resolution, debt oversight, and capital market transparency to prevent corporate zombification and economic drag. This study provides the first comparative African evidence on zombie firms and introduces a replicable classification method suitable for low‐transparency markets.