Conference Agenda

We show how the threat of “uncertainty-induced zombification”—creditors’ willingness to keep their distressed borrowers alive when faced with uncertainty—shapes various industry dynamics. Under a real options framework, we demonstrate that unlevered firms become reluctant to invest and disinvest in anticipation that uncertainty induces creditors to convert defaulting rival firms into zombies. We validate our theory using dynamic, industry-specific estimates of expected uncertainty induced zombification together with loan contract-level data. Empirically, higher uncertainty-led rival zombification expectations prompt healthy firms to reduce their costly-to-reverse capital investment and disinvestment, hiring, and establishment-level openings and closures (intensive and extensive margins are affected). We confirm those dynamics using granular, near-universal data on the asset allocation decisions of global shipping firms. Critically, uncertainty-led zombification expectations depress healthy firms’ sales, profits, and stock returns. Our results reveal nuanced effects on creative destruction—while healthy firms’ asset allocation slows down, their innovation activity accelerates. Our findings highlight a novel channel through which uncertainty shapes firms’ capital accumulation, distorting their real and financial policies and performance.