Financial health and airline safety
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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Volume (Year): 25 (2004)
Issue (Month): 1 ()
Pages: 1-16
| Handle: | RePEc:wly:mgtdec:v:25:y:2004:i:1:p:1-16 |
| Contact details of provider: | Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976
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References listed on IDEAS
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