How Do Firm Financial Conditions Affect Product Quality and Pricing?

50 Pages Posted: 16 Mar 2010 Last revised: 18 Feb 2011

Gordon M. Phillips

Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)

Giorgo Sertsios

Universidad de los Andes, Chile

Multiple version iconThere are 2 versions of this paper

Date Written: March 16, 2010

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.

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

JEL Classification: G33, D21

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: https://ssrn.com/abstract=1572292 or http://dx.doi.org/10.2139/ssrn.1572292

Gordon M. Phillips (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Giorgo Sertsios

Universidad de los Andes, Chile ( email )

Mons. Álvaro del Portillo
Las Condes
Santiago, 12.455
Chile

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