Thursday, March 18, 2010
Blog readers may be interested in a new working paper on financial distress and bankruptcy in the airline industry. See Gordon M. Phillips & Giorgio Sertsios, How Do Firm Financial Conditions Affect Product Quality and Pricing? (Working Paper, Mar. 16, 2010) (available from SSRN here). From the abstract:
We analyze the interaction between firm choice of product quality and pricing decisions with financial distress and bankruptcy in the airline industry. We consider an airline's choice of quality and price as dynamic decisions that trade-off current cash flows for future demand from consumers. 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 and pricing decisions are differentially affected by financial distress and bankruptcy. Product quality decreases when airlines are in financial distress, as financial distress reduces a firm’s incentive to invest in quality. In addition, firms price more aggressively when in financial distress consistent with them trying to increase short-term market share and revenues. In contrast, in bankruptcy product quality increases relative to when the firm is in financial distress.