Working Paper: NBER ID: w17233
Authors: Gordon M. Phillips; Giorgo Sertsios
Abstract: We analyze the interaction of firm product quality and pricing decisions with financial distress and bankruptcy in the airline industry. We consider an airline's choices of quality and price as dynamic decisions that trade off current cash flows for future revenue. We examine how airline mishandled baggage, on-time performance and pricing are related to financial distress and bankruptcy, controlling for the endogeneity of financial distress and bankruptcy. We find that an airline's quality decisions are differentially affected by financial distress and bankruptcy. Product quality decreases when airlines are in financial distress, consistent with financial distress reducing a firm's incentive to invest in quality. In contrast, in bankruptcy product quality increases relative to financial distress. In addition, we find that firms price more aggressively when in financial distress consistent with firms trying to increase short-term market share and revenues.
Keywords: Financial Distress; Bankruptcy; Product Quality; Pricing; Airline Industry
JEL Codes: G33; L1; L21; L22; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial distress (G33) | product quality (L15) |
| financial distress (G33) | pricing (D49) |
| bankruptcy (K35) | product quality (L15) |
| financial distress (G33) | bankruptcy (K35) |
| bankruptcy (K35) | pricing (D49) |
| financial distress (G33) | mishandled baggage rates (L93) |
| financial distress (G33) | on-time performance (L90) |