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Financial health and airline safety

Author

Listed:
  • 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)

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.

Suggested Citation

  • Gregory Noronha & Vijay Singal, 2004. "Financial health and airline safety," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 25(1), pages 1-16.
  • Handle: RePEc:wly:mgtdec:v:25:y:2004:i:1:p:1-16
    DOI: 10.1002/mde.1133
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    File URL: http://hdl.handle.net/10.1002/mde.1133
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    References listed on IDEAS

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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. Fox, Sarah, 2014. "Safety and security: The influence of 9/11 to the EU framework for air carriers and aircraft operators," Research in Transportation Economics, Elsevier, vol. 45(C), pages 24-33.
    4. 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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