Are the Bankrupt Skies the Friendliest?

Ciliberto, Federico and Schenone, Carola (2012): Are the Bankrupt Skies the Friendliest?

Abstract

We use data from the US airline industry to investigate whether firms that are under bankruptcy protection, as well as these firm's product market rivals, change the quality of the products they offer. We measure the quality of the services offered by a carrier using flight cancellations and delays, and the age of the aircraft used by the carrier. We find that delays and cancelations are less frequent during bankruptcy filings but return to their pre-bankruptcy levels once the bankrupt firm emerges from bankruptcy. We also find that firms use Chapter 11 filings to permanently reduce the age of their fleet. We do not find evidence of statistically and economically significant changes by the airline's competitors along any of the dimensions above.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bankruptcy, Chapter 11, Product Market Quality, Airline Industry
• Subjects: K - Law and Economics > K2 - Regulation and Business Law; G - Financial Economics > G3 - Corporate Finance and Governance; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance

References

Ashenfelter, Orley, 1978, Estimating the Effect of Training Programs on Earnings, The Review of Economics and Statistics, (60) 1: 47-57.

Bhagat, Sanjai , Nathalie Moyen, and Inchul Suh, 2005, Investment and internal funds of distressed firms, Journal of Corporate Finance, (11) 3: 449-472.

Berry, Steven, 1990, Airport Presence as Product Differentiation, American Economic Review Papers and Proceedings, (80) 2: 394-399.

Berry, Steven, and P. Jia, 2010, Tracing the woes: An empirical analysis of the airline industry, American Economic Journal: Microeconomics (2) 3: 1-43.

Bris, Arturo, Ivo Welch, and Ning Zhu, 2006, The Costs of Bankruptcy, The Journal of Finance (61): 1253-1303.

Brueckner, Jan K., Nichola J. Dyer, and Pablo T. Spiller, 1992, Fare Determination in Airline Hub-and-Spoke Networks, RAND Journal of Economics, (23) 3: 309-333.

Carapeto, Maria, 2005, Bankruptcy bargaining with outside options and strategic delay, Journal of Corporate Finance, (11) 4: 736-746.

Chevalier, Judith, 1995a, Do LBO Supermarkets charge more? An empirical analysis of the effects of LBO on supermarket pricing, Journal of Finance (50): 1095-1112.

Chevalier, Judith, 1995b, Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry, American Economic Review (85): 415-435.

Chevalier, Judith, and Scharfstein, David, 1995, Liquidity Constraints and the Cyclical Behavior of Markups, American Economic Review (85): 390-396.

Ciliberto, Federico, and Carola Schenone, 2011, Bankruptcy and Product-Market Competition: Evidence from the Airline Industry, Working Paper, University of Virginia.

Dasgupta, Sudipto, and Sheridan Titman, 1998, Pricing Strategy and Financial Policy, Review of Financial Studies (11): 705-737.

Eckbo, Espen and Karin Throburn, 2009, Creditor financing and overbidding in bankruptcy auctions: Theory and tests, Journal of Corporate Finance, (15) 1: 10-29.

Ferris, Stephen, Narayanan Jayaraman, and Anil Makhija, 1997, The response of competitors to announcements of bankruptcy: An empirical examination of contagion and competitive effects, Journal of Corporate Finance, (3) 4: 367-395.

Franks, Julien R., and Walter N. Torous, 1989, An empirical investigation of U.S. firms in reorganization, Journal of Finance (44): 747-769.

Fresard, Laurent, 2010, Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings, Journal of Finance (65): 1097-1122

Friedberg, Leora, 1998, Did Unilateral Divorce Raise Divorce Rates? Evidence from Panel Data, American Economic Review (88) 3 : 608-627

Holmes, George, M., and Nicholas Rupp, 2006, An Investigation Into the Determinants of Flight Cancellations, Economica (73): 749-784.

Hotchkiss, Edith, and Robert Mooradian, 2003, Auctions in Bankruptcy, Journal of Corporate Finance, (9) 5: 555-574.

John, Kose, Larry H.P. Lang, and Jeffry Netter, 1992, The Voluntary Restructuring of Firms in Response to Performance Decline, Journal of Finance, (47) 3: 891-917.

Li, Wei , Marc Lipson, Kamalini Ramdas, and Jonathan Williams, 2011, Can Stock Price Movements Inform Operational Improvements Efforts? Evidence from the Airline Industry, University of Virginia Working Paper.

Mayer, Christopher and Sinai Todd, 2003, Network Effects, Congestion Externalities, and Air Traffic Delays: Or Why Not All Delays Are Evil, American Economic Review (93) 4: 1194--1215.

Mazzeo, Michael , 2003, Competition and Service Quality in the US Airline Industry, Review of Industrial Organization (22): 275-296.

Oliver Richard, 2003, Flight Frequency and Mergers in Airline Markets, International Journal of Industrial Organization (21): 907-922.

Opler, Tim, and Sheridan Titman, 1994, Financial Distress and Corporate Performance, Journal of Finance (49): 1015-1040.

Pichler, Pegeret, Alex Stomper, and Christine Zulehner, 2008, Why leverage affects pricing, Review of Financial Studies 21(4): 1733-1765

Ramdas, Kamalini, and Jonathan Williams, 2011, An Empirical Investigation into the Tradeoffs that Impact On-Time Performance in the Airline Industry, University of Virginia Working Paper.

Rupp, Nicholas, D. Owens, and L. Plumly, 2006, Does Competition Influence Airline On-time Performance, in Advances in Airline Economics: Competition Policy and Antitrust, Darin Lee (Editor), Elsevier B.V.

Jean Tirole, The Theory of Industrial Organization, MIT Press, 1988.

Thorburn, Karin S., 2000, Bankruptcy Auctions: Costs, Debt Recovery and Firm Survival, Journal of Financial Economics (40): 337-368.

Veerbek, M. and T. Nijman, 1992, Testing for Selectivity Bias in Panel Data Models, International Economic Review (33) 3: 681-703.