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Financial health and airline safety

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Author Info

  • Gregory Noronha

    (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)

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    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.

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    File URL: http://hdl.handle.net/10.1002/mde.1133
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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

    Volume (Year): 25 (2004)
    Issue (Month): 1 ()
    Pages: 1-16

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    Handle: RePEc:wly:mgtdec:v:25:y:2004:i:1:p:1-16

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    Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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    References

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    1. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    2. Griffin, Paul A & Sanvicente, Antonio Z, 1982. " Common Stock Returns and Rating Changes: A Methodological Comparison," Journal of Finance, American Finance Association, vol. 37(1), pages 103-19, March.
    3. Sudipto Dasgupta & Sheridan Titman, 1996. "Pricing Strategy and Financial Policy," NBER Working Papers 5498, National Bureau of Economic Research, Inc.
    4. Charles P. Himmelberg & R. Glenn Hubbard & Darius Palia, 2000. "Understanding the Determinants of Managerial Ownership and the Link Between Ownership and Performance," NBER Working Papers 7209, National Bureau of Economic Research, Inc.
    5. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
    6. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    7. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-24, January.
    8. Golbe, Devra L, 1986. "Safety and Profits in the Airline Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 34(3), pages 305-18, March.
    9. Chalk, Andrew J, 1987. "Market Forces and Commercial Aircraft Safety," Journal of Industrial Economics, Wiley Blackwell, vol. 36(1), pages 61-81, September.
    10. Bosch, Jean-Claude & Eckard, E Woodrow & Singal, Vijay, 1998. "The Competitive Impact of Air Crashes: Stock Market Evidence," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 503-19, October.
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    Cited by:
    1. Oster, Clinton V. & Strong, John S. & Zorn, C. Kurt, 2013. "Analyzing aviation safety: Problems, challenges, opportunities," Research in Transportation Economics, Elsevier, vol. 43(1), pages 148-164.
    2. Wang, Zuozheng & Hofer, Christian & Dresner, Martin E., 2013. "Financial condition, safety investment and accident propensity in the US airline industry: A structural analysis," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 49(1), pages 24-32.
    3. Gordon M. Phillips & Giorgo Sertsios, 2011. "How Do Firm Financial Conditions Affect Product Quality and Pricing?," NBER Working Papers 17233, National Bureau of Economic Research, Inc.

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