Financial Health and Product Safety

Managerial and Decision Economics, Forthcoming

Posted: 20 Aug 2003

See all articles by Gregory Noronha

Gregory Noronha

University of Washington, Tacoma - Milgard School of Business

Vijay Singal

Virginia Tech

Abstract

We examine the relationship between financial health and product safety in the airline industry. Theoretical models predict that agency problems are exacerbated when a firm is in or near financial distress and lead to increased risk-taking behavior by such firms. We document support for this prediction. Our empirical model, which uses mishaps to proxy for airline safety, and lagged bond ratings to proxy for financial well-being, shows a significant correlation between the two measures: airlines with highly-rated bonds are less likely to be involved in accidents. We find that, on average, a whole higher letter grade for the bond rating is associated with a ten percent lower probability of accident. Our results remain robust in the presence of other variables that could affect the number of airline mishaps.

Note: This is a description of the article and not the actual abstract.

Keywords: financial health, airlines, accidents, reputation, distress, bond ratings, mishaps, incidents

JEL Classification: G32, L93

Suggested Citation

Noronha, Gregory and Singal, Vijay, Financial Health and Product Safety. Managerial and Decision Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=429848

Gregory Noronha

University of Washington, Tacoma - Milgard School of Business ( email )

1900 Commerce Street
Campus Box 358420
Tacoma, WA 98402-3100
United States

Vijay Singal (Contact Author)

Virginia Tech ( email )

Blacksburg, VA 24061
United States
5402317750 (Phone)

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