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 healthy 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 uncertainty induced zombification together with loan contract-level data. Empirically, higher uncertainty-led rival zombification prompts unlevered firms to reduce their investment, disinvestment, and employment; as well as establishment-level openings and closures (intensive and extensive margins are affected). These hard-to-reverse decisions are modulated by the anticipation of the extent to which distressed rivals will be subsidized by their creditors. Critically, they depress healthy firms’ long-run sales revenues, profits, and market values. Our findings highlight a novel channel through which uncertainty influences firms’ capital accumulation, performance, and outcomes.