How many firms around the world are in or close to corporate distress?  

If we only look at those firms that underperformed on these criteria in both 2021 and 2022, these percentages naturally drop. The shares of firms with insufficient means to pay their interest expenses, companies with negative Z-scores, and value-destroying firms fell to 25%, 8%, and 28% respectively. The fact that these percentages are lower than those in the last paragraph reveals the sizable dynamics in and out of corporate distress and that it is worth following the health of individual firms on an ongoing basis.

Second, on the ICR metric, the shares of firms in or near corporate distress fluctuate considerably over time. The share of zombie firms jumped during the Global Financial Crisis and in the first year of the COVID pandemic. Subsequently, loose monetary policy appears to have lowered the share of zombies. A similar response can be found for the Z-score and in our economic profits measure. Looking back, however, we note the share of firms with elevated bankruptcy risk remained stable during the entire 2012-2020 period, and the share that destroyed value fell during the US Federal Reserve Board’s 2015-2019 hiking cycle and the COVID crisis.

Australian and Canadian firms show highest signs of distress

Third, these metrics vary significantly across our 21 economies. For 2021-2022, for example, the share of firms, which were in distress according to our ICR criterion varied between 8% in Japan and 56% in Canada. Japanese corporates were, in fact, the ‘healthiest’ on all three metrics presented here. Australian and Canadian firms, on the other hand, showed a high likelihood of corporate distress on all three measures. Dutch companies, in turn, featured among the least healthy according to the ICR criterion, but among the most solid ones when looking at Z-scores and economic profits instead. The Dutch example demonstrates that the ICR (zombification), the Z-score (bankruptcy risk), and economic profits (value creation) contain different pieces of information about corporate distress.

Fourth, our findings are very much in line with others. Altman et. al. (2021), for instance, find the 2021 shares of firms with a three-year moving average for the ICR below 1 and for the Z-score below 0 to be about 21% and 9%, respectively (in the world’s 20 largest economies). They also document the highest signs of distress in recent years for Australian and Canadian firms and the lowest for Japanese. Banerjee and Hofmann (2022), who use the same two-year ICR condition as we do but also require Tobin’s Q to be below the sector median, find a 15% zombie share for 2017 (for 14 economies).

As they normalize fiscal and monetary conditions, policymakers are walking a tightrope between terminating firms on life support and reviving viable ones. Saving firms with unfavorable ICRs but favorable other indicators is an approach worth considering. With our regularly updated data, analysts and officials are better placed to assess corporate distress at the firm, sectoral, and national levels.