The management of an airline suffering from financial distress decides to put off its plans to remodel some of its planes' interiors in order to attract more business clientele since the
Additional expected cash flow generated would only go to pay off its bondholders. Instead,
Management uses the funds to repurchase some of its outstanding shares. This problem is
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This problem is known as underinvestment, as the airline is not using its resources to invest in projects that would generate future cash flows and potentially improve the company's financial condition. Instead, it is opting to repurchase shares, which may benefit shareholders but do not create any long-term value for the company. This decision may exacerbate the financial distress the airline is facing, as it is neglecting investments that could potentially improve its profitability and instead focusing on short-term gains. This problem is known as underinvestment, as the management is choosing to forgo long-term investments (remodeling the planes' interiors) in favor of short-term gains (repurchasing shares), even though the former may lead to greater profitability in the future. This decision is being made due to financial distress, which suggests that the company may be underinvesting in its operations overall.

The Management of an Airline Suffering from Financial Distress Decides