Financial Health and Airline Safety
32 Pages Posted: 26 Jan 1998
Date Written: November 1997
Abstract
Theoretical models suggest that firms may pursue riskier strategies in times of financial distress. For example, financially weak firms may compromise safety and quality to maximize current period profits. If the riskier strategy fails, then the stockholders are content to hand over the bankrupt firm to the debt holders. Despite much interest, there is little, if any, empirical evidence that relates financial health to the risk-taking behavior of firms. We explore this relationship for the airline industry. Using bond ratings to proxy for financial health and airline mishaps to measure safety, we find a significant correlation: airlines with higher quality bond ratings are less likely to experience mishaps than airlines with lower quality ratings. On average, an airline with an investment grade bond rating has a 25% lower probability of a mishap than an airline with a below investment grade bond rating. The findings imply that the Federal Aviation Administration (FAA) should shift part of its inspection and surveillance resources from financially strong airlines to financially weak airlines. Further, reliance on readily available bond ratings makes it easy to implement these recommendations.
JEL Classification: G32, G38, L93
Suggested Citation: Suggested Citation
Here is the Coronavirus
related research on SSRN
Recommended Papers
-
What Do We Know About Capital Structure? Some Evidence from International Data
By Raghuram G. Rajan and Luigi Zingales
-
The Theory and Practice of Corporate Finance: Evidence from the Field
By John R. Graham and Campbell R. Harvey
-
The Theory and Practice of Corporate Finance: The Data
By John R. Graham and Campbell R. Harvey
-
Market Timing and Capital Structure
By Malcolm P. Baker and Jeffrey Wurgler
-
Market Timing and Capital Structure
By Malcolm P. Baker and Jeffrey Wurgler
-
Testing Tradeoff and Pecking Order Predictions About Dividends and Debt
By Eugene F. Fama and Kenneth R. French
-
Testing Static Trade-Off Against Pecking Order Models of Capital Structure
-
Optimal Capital Structure Under Corporate and Personal Taxation
By Harry Deangelo and Ronald W. Masulis
