How Do Firm Financial Conditions Affect Product Quality and Pricing?

56 Pages Posted: 24 Jul 2011

See all articles by Gordon M. Phillips

Gordon M. Phillips

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

Giorgo Sertsios

Universidad de los Andes, Chile

Multiple version iconThere are 2 versions of this paper

Date Written: July 2011

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.

Suggested Citation

Phillips, Gordon M. and Sertsios, Giorgo, How Do Firm Financial Conditions Affect Product Quality and Pricing? (July 2011). NBER Working Paper No. w17233. Available at SSRN: https://ssrn.com/abstract=1893388

Gordon M. Phillips (Contact Author)

Dartmouth College - Tuck School of Business ( 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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