Corporate Motivations of Product Recall Strategy: Exploring the Role of Corporate Social Responsibility in Stakeholder Engagement

Abstract

Prior evidence shows voluntary recalls do not lead to better abnormal stock returns when compared with involuntary ones, although they intend to convey positive signals. This puzzling evidence can be attributed to the ignorance of information uncertainty associated with different product recall strategies. Because of the mixed managerial motives inherent in business strategy, voluntary recalls may involve greater information uncertainty than involuntary ones that prevent investors from receiving the intended positive messages. This paper argues that corporate social responsibility (CSR) establishes a firm's presence in stakeholder engagement and plays a crucial role in certifying information conveyed by voluntary product recalls. The findings suggest that firms with better CSR performance receive significantly greater firm value change than those with poor CSR performance upon the announcements of voluntary recalls. Besides, the CSR effect is mainly driven by the firm's engagement in technical CSR activities because of the direct dialogues with stakeholders caring about products. Copyright © 2014 John Wiley & Sons, Ltd and ERP Environment

Value Relevance of Stakeholder Engagement: The Influence of National Culture

“…Perhaps surprisingly, the economic consequences of stakeholder engagement have been neglected substantially in prior literature, except for its impact on firm performance (Martín-de Castro et al, 2015) and stock returns (Chang & Chang, 2015). Our study fills this gap by providing empirical evidence on the impact of stakeholder engagement on firms' market valuation.…”

Product recall as a way of responsible management of a firm: The roles of corporate social responsibility and board members' sense of ownership

“…Yet some firms voluntarily recall the products and communicate clearly about the recall procedure. In the latter case, the product recalls are understood as a responsible behavior in response to the product-harm crisis (Chang & Chang, 2015;Chen, Ganesan, & Liu, 2009;Siomkos & Kurzbard, 1994).…”

Impact of Automobile Recalls on Stock Prices: A Study in the Indian Context

“…A product recall announcement may be perceived differently by the stakeholders (Chang & Chang, 2015). If the stakeholders feel that the company is not burying the problem under the carpet and that the recall is a step in the right direction, the stock price will not be adversely affected.…”

“…However, if the notion of defective processes and safety issues looms large, the stock price of the company may be adversely affected. Chang and Chang (2015) aver that when consumers perceive product recall information as ambiguous and confusing, financial results turn out to be disappointing. In the case of government mandated recalls, the dissemination of information is more comprehensive, especially on the hazardous defects of the vehicles, leading to substantially negative returns.…”

“…These proactive strategies are perceived as pointers to considerable financial loss that might accrue to the firm. Findings of Laufer and Coombs (2006), Peloza and Shang (2011), Ducassy (2013) and Chang and Chang (2015) suggest that firms with good reputation and firms that indulge in corporate social responsibility (CSR) are better placed to withstand a product recall crisis.…”