Shadows of economic policy uncertainty: exploring the debt-distress nexus in zombie firms

Zombie firms persist in an economy, regardless of their unprofitability. These firms manage to exist due to continuous borrowing, which raises the question of whether debt financing (DF) is sustainable for their survival. Hence, in this study, we attempted to investigate the role of DF in the financial distress (FD) of zombie firms. We relied on the firm-level panel data of Pakistani zombie firms from 2020 to 2024 to attain the research objectives. The results obtained through panel corrected standard error (PCSE) prove that DF exacerbates the FD of zombie firms. Besides, the moderating role of economic policy uncertainty (EPU) is found to be significantly negative. The findings revealed that EPU heightens the FD of zombie firms. Regarding policy recommendations, management of zombie firms should reduce their reliance on DF and move out to alternative financing options. Policymakers need to handle both the unsustainable debt practices of zombie firms and instability in economic policies.