Environmental regulation and the proliferation of zombie firms: evidence from China

Abstract This paper examines the impact of environmental regulation on the emergence of zombie firms within China’s pollution levy system. Using firm-level data from multiple sources and a difference-in-differences design, we show that imposing a higher level of pollutant levy rates significantly elevates the risk of firms becoming zombies. Switching to a more stringent policy increases the risk of becoming a zombie firm by 6.2%. Consequently, we find that being a zombie firm implies that it allocates fewer resources to pollution abatement, exhibiting higher pollution intensity. We also show that less productive firms and state-owned firms are more prone to becoming zombie firms when facing with increased level of environmental regulation stringency. This study thus provides novel insights into the unintended risk of zombie firm proliferation as a result of increasing environmental regulation.