Does the corporate governance index matter for company zombification?
Authors: Brahmana Rayenda Khresna , Setiawan Doddy 
Published: January 2025

Purpose

This study investigates how the quality of corporate governance practices reduces the likelihood of firms becoming Zombie companies. By developing a Corporate Governance Index (CGI) based on 52 criteria from the regulatory framework, the hypothesis is tested that companies with higher CGI scores are less prone to becoming Zombie companies. The study aligns with the agency theory framework, highlighting the significance of effective governance in mitigating financial distress and preventing firms from becoming Zombies.

Design/methodology/approach

The study uses a sample of 3,051 listed Indonesian firms from 2014 to 2022, excluding financial and utility companies. Data were sourced from the Bursa Indonesia website, focusing on annual reports. Continuous variables were winsorized at the 1st and 99th percentiles. The analysis involves developing a CGI tailored to the Indonesian context and examining its impact on the likelihood of firms becoming Zombie companies. Endogeneity concerns are addressed to ensure robustness. Post-hoc analyses investigate the roles of political connections and family ownership in the firm’s propensity to become Zombie firms.

Findings

The results demonstrate that higher CGI scores are associated with a reduced likelihood of firms becoming Zombie companies, supporting the agency theory. Post-hoc analysis reveals that political connections and family ownership significantly contribute to a firm’s Zombie status. However, the influence of CGI remains crucial regardless of these factors. The findings are consistent with the literature, emphasizing the importance of effective corporate governance in preventing Zombification.

Research limitations/implications

The study contributes to the academic literature by highlighting the importance of using a governance index to assess the impact of governance practices on firm dynamics. It highlights the relevance of corporate governance quality in understanding and mitigating Zombie theory. The research suggests further investigation into the role of CGI in helping companies transition from Zombie status to financial health and exploring the influence of upper-echelon variables on the CGI-Zombieness relationship.

Practical implications

From a practical standpoint, the findings advocate for the enhancement of control and monitoring mechanisms in firms, particularly regarding debt risk-taking decisions. Policymakers are encouraged to institutionalize the use of governance indices to evaluate firm performance. The study suggests extending such regulations to non-listed firms and SMEs to prevent the proliferation of Zombie companies. Effective governance practices are crucial for mitigating risks associated with political connections and family ownership.

Originality/value

This study provides a fresh perspective on the impact of the Corporate Governance Index on firm Zombieness within the Indonesian context. By tailoring the CGI to the specific regulatory framework, it offers reliable insights into the role of governance quality in preventing firms from becoming Zombies. The study bridges a gap in the literature by linking agency theory with Zombie theory, emphasizing the necessity of effective control and monitoring to avoid financial distress. The research highlights the pivotal role of corporate governance, even in the presence of political connections and family ownership.