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| Recovery Ratios and Survival Times for Corporate Bonds by Ivailo Izvorski of the International Monetary Fund July 1997 Abstract: The behavior of firms in financial distress has attracted considerable academic and policy interest in recent years. The turmoil in the U.S. airline industry has triggered much of the public policy discussion, as some observers have argued that airlines in financial distress, particularly those operating under Chapter 11 bankruptcy protection, reduce prices to the point of harming themselves and their competitors. This study investigates the pricing strategies of bankrupt airlines and their rivals. The data suggest that an airline's prices typically decline somewhat before it fails for bankruptcy protection and remain slightly depressed over the subsequent two or three quarters. We find no evidence that competitors of the bankrupt airlines lower their prices, however, nor that they lose passengers to their bankrupt rival. These results indicate that bankrupt carriers do not harm the financial health of their competitors. Keywords: corporate default, recovery ratio, survival time. Books Referenced in this paper: (what is this?)
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