Several recent works have studied the performance of firms in economic distress ('zombies'), identifying them on the basis of profitability measured net of depreciation and amortization. While theoretically reasonable, this approach has significant methodological flaws and may produce misleading conclusions, especially when used for international comparisons. This work evaluates the seriousness of these shortcomings.
The key results show that, compared with an alternative based on profitability gross of depreciation and amortization, the measurement typically used in the recent literature on zombie firms: i) is less able to predict future firm performance; ii) identifies those firms that invested heavily in previous years as zombies; and iii) is strongly affected by cross-country differences in the tax treatment of amortization.
