How Do Firm Financial Conditions Affect Product Quality and Pricing?

Gordon Phillips and Giorgo Sertsios

No 17233, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G33 L1 L21 L22 L93 (search for similar items in EconPapers)
Date: 2011-07
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-com
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Published as “How Do Firm Financial Conditions A ff ect Product Quality and Pricing?” with Giorgo Sertsios, Management Science , 2013, 59(8): 1764-1782.

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Journal Article: How Do Firm Financial Conditions Affect Product Quality and Pricing? (2013)
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