Financial health and airline safety

Gregory Noronha and Vijay Singal
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Gregory Noronha: School of Management, Arizona State University West, Phoenix, AZ 85069-7100, USA, Postal: School of Management, Arizona State University West, Phoenix, AZ 85069-7100, USA
Vijay Singal: Department of Finance, Pamplin College of Business, Virginia Tech, Blacksburg, VA 24061-0221, USA, Postal: Department of Finance, Pamplin College of Business, Virginia Tech, Blacksburg, VA 24061-0221, USA

Managerial and Decision Economics, 2004, vol. 25, issue 1, 1-16

Abstract: Agency-cost models suggest that firms may pursue riskier strategies in times of financial distress. For example, stockholders of financially weak firms in industries where quality cannot be observed ex-ante have an incentive to compromise safety and quality to maximize current period profit. However, there exists only a modest amount of 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, a whole letter grade better bond rating is associated with a 10% lower probability of a mishap. Copyright © 2004 John Wiley & Sons, Ltd.

Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:25:y:2004:i:1:p:1-16

DOI: 10.1002/mde.1133

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