Abstract

http://ssrn.com/abstract=1572292
 
 

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How Do Firm Financial Conditions Affect Product Quality and Pricing?


Gordon M. Phillips


University of Southern California; National Bureau of Economic Research (NBER)

Giorgo Sertsios


Universidad de los Andes, Chile

March 16, 2010

AFA 2011 Denver Meetings Paper
Robert H. Smith School Research Paper No. RHS RHS-06-141

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 and pricing 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 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 financial distress.

Number of Pages in PDF File: 50

Keywords: Financial Distress, Bankruptcy, Product Quality, Pricing, Airlines

JEL Classification: G33, D21

working papers series


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Date posted: March 16, 2010 ; Last revised: February 18, 2011

Suggested Citation

Phillips, Gordon M. and Sertsios, Giorgo, How Do Firm Financial Conditions Affect Product Quality and Pricing? (March 16, 2010). AFA 2011 Denver Meetings Paper; Robert H. Smith School Research Paper No. RHS RHS-06-141. Available at SSRN: http://ssrn.com/abstract=1572292 or http://dx.doi.org/10.2139/ssrn.1572292

Contact Information

Gordon M. Phillips (Contact Author)
University of Southern California ( email )
Marshall School of Business
Los Angeles, CA 90089
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Giorgo Sertsios
Universidad de los Andes, Chile ( email )
Chile
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