Capital Structure Decisions and Zombie Firms in India

Abstract

This study explores the impact of Indian non-financial firms' capital structure on corporate zombification. The study uses a logit model, with the capital structure mix as a covariate, to determine the likelihood of a firm becoming a zombie. Panel data from 1999 to 2020 for all non-financial firms were utilised to examine the effect of debt capital on the probability of corporate zombification. The findings reveal that increased debt-to-equity financing raises the risk of default. However, the study underscores the importance of maintaining an optimal debt level and conscious capital structure decision-making by managers that support relevant capital structure theories. Going overboard with debt capital erodes its benefits. Debt financing is associated with an unequal distribution of information and financial commitments. To a certain extent, the conclusions of the present study could guide firm managers to make informed decisions related to capital structure and adjust the intensity and direction of a firm turning into a zombie. By providing practical insights, the study empowers managers to make strategic decisions that can potentially prevent their firms from becoming zombies. The study will further enrich the literature, focusing on the factors responsible for a firm turning into a zombie. © 2025 John Wiley & Sons Ltd.