Does ESG increase the probability that a company will emerge from zombie status successfully? Evidence from European Companies

Abstract

Based on the panel data of European listed companies from 2015 to 2023, this study adopts a combination of theoretical and empirical methods to investigate the mechanism of ESG and sub-dimension performance on the probability of zombie firms to recover. The study adopts the dual screening method of Altman Z-score and interest coverage to identify zombie firms and constructs a fixed effects regression model for analysis. The results show that ESG does not significantly help zombie firms escape zombie status. Still, performance in the governance dimension substantially increases the probability of firms getting out of zombie status. This finding supports the core view of agency theory that governance optimization can mitigate decision inefficiency. Notably, the E and S dimensions do not show positive effects in the short run. They may even aggravate the firms' burden, demonstrating the heterogeneous impact of the ESG dimensions. Further study analysis suggests that firm size and profitability are the underlying conditions for effective governance effects. The findings of this paper can provide important insights into the development of zombie firms in Europe, and in dealing with corporate distress, stakeholders, policymakers, and decision makers should prioritize the promotion of governance structure optimization instead of simply implementing a one-size-fits-all mandatory ESG disclosure.