How do firm financial conditions affect product quality and pricing?

Gordon Phillips, Giorgo Sertsios

Research output: Contribution to journalArticlepeer-review

62 Scopus citations


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.

Original languageEnglish
Pages (from-to)1764-1782
Number of pages19
JournalManagement Science
Issue number8
StatePublished - Aug 2013
Externally publishedYes


  • Corporate finance
  • Finance
  • Firm objectives
  • Firm strategy
  • Industrial organization
  • Market performance
  • Market structure
  • Organization and behavior


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