Financial condition and product market cooperation

• Published in: Journal of corporate finance (Amsterdam, Netherlands) Vol. 31; pp. 1 - 16
• Main Authors: Gustafson, Matthew T., Ivanov, Ivan T., Ritter, John
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.04.2015; Elsevier Science Ltd
• Subjects: Air fares; Airfare hikes; Airline industry; Capacity constraints; Cooperation; Financial distress; Financial performance; Liquidity; Price increases; Product market cooperation; Studies; Product market cooperation; G30; G33; G32; Liquidity; Airfare hikes; L11; Financial distress; Capacity constraints; L13
• ISSN: 0929-1199; 1872-6313
• DOI: 10.1016/j.jcorpfin.2014.12.014

We provide evidence that existing studies relating financial condition to product market cooperation produce mixed results because of unique features of the industries examined. In particular, all evidence suggesting that poor financial condition decreases cooperation comes from the airline industry during periods of high idle capacity. Using a unique data set of aggregate airfare hikes and a more recent low-idle-capacity period, we find that poor financial condition is positively associated with product market cooperation. Although financially weak airlines appear to value the immediate cash flows of increased cooperation, only liquidity-constrained firms seem willing to incur the cost of cooperative attempts. •We examine the effect of financial condition on product market cooperation.•Poor financial health predicts cooperation.•Financially weak firms attempt to cooperate more frequently.•When a rival seeks cooperation, financially weak firms partake more often.•Conflicting evidence on this topic is attributable to an industry specific phenomenon.