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How Do Firm Financial Conditions Affect Product Quality and Pricing?

Author

Listed:
  • Gordon Phillips

    (Finance and Business Economics, Marshall School of Business, University of Southern California, Los Angeles, California 90089)

  • Giorgo Sertsios

    (C. T. Bauer College of Business, University of Houston, Houston, Texas 77204)

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. This paper was accepted by Wei Jiang, finance.

Suggested Citation

  • Gordon Phillips & Giorgo Sertsios, 2013. "How Do Firm Financial Conditions Affect Product Quality and Pricing?," Management Science, INFORMS, vol. 59(8), pages 1764-1782, August.
  • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:8:p:1764-1782
    DOI: 10.1287/mnsc.1120.1693
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    finance; corporate finance; industrial organization; market structure; firm strategy; market performance; firm objectives; organization and behavior;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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