Does a Firm's Product-Recall Strategy Affect Its Financial Value? An Examination of Strategic Alternatives during Product-Harm Crises

Abstract

Product-harm crises often result in product recalls, which can have a significant impact on a firm's reputation, sales, and financial value. In managing the recall process, some firms adopt a proactive strategy in responding to consumer complaints, while others are more passive. In this study, the authors examine the impact of these strategic alternatives on firm value using Consumer Product Safety Commission recalls during a 12-year period from 1996 to 2007. Using the event study method, the authors show that regardless of firm and product characteristics, proactive strategies have a more negative effect on firm value than more passive strategies. An explanation for this surprising result is that the stock market interprets proactive strategies as a signal of substantial financial losses to the firm. When a firm proactively manages a product recall, the stock market infers that the consequence of the product-harm crisis is sufficiently severe that the firm had no choice but to act swiftly to reduce potential financial losses. Therefore, firms dealing with product recalls must be sensitive to how investors might interpret a proactive strategy and be aware of its potential drawbacks.

Eco-friendly product development strategy: antecedents, outcomes, and contingent effects

“…Self-selection bias To control for selection bias in our analyses, we followed Heckman's (1979) two-stage test (e.g., Chen et al 2009;Kale et al 2002;Poppo and Zenger 2002). 9 We applied two probit selection models in IBM SPSS 19 using the full sample of 183 firms to estimate the probability that a firm will achieve low (0) or high (1) product development effectiveness and the company's decision to green its product development strategy (1) or not (0), respectively.…”

The Ethical Judgment and Moral Reaction to the Product-Harm Crisis: Theoretical Model and Empirical Research

“…The studies in this category also do not provide any guidance to understand the consumers' reactions to a product-harm crisis. The second category of product-harm crisis studies focuses on using the measurement methods to find out the impact of the crisis on enterprise performance, such as the stock price [16], product sales [2], and the effect of advertising [17]. For example, Chen et al found that no matter what kind of industry, the active response strategy is worse than the passive response strategy on affecting the financial value of the corporations in product recall [16].…”

“…The second category of product-harm crisis studies focuses on using the measurement methods to find out the impact of the crisis on enterprise performance, such as the stock price [16], product sales [2], and the effect of advertising [17]. For example, Chen et al found that no matter what kind of industry, the active response strategy is worse than the passive response strategy on affecting the financial value of the corporations in product recall [16]. This surprising conclusion can be understood through the corporate crisis response strategies: when a corporation takes active action to respond to the crisis, investors in the stock market will think that the crisis is more serious by comparing with the passive actions or no action.…”

Ethical Dilemma Faced by General Motors India

“…The harm to the product can ruin the brand equity that was carefully cultivate thereby damaging the company"s reputation and leading to loss in revenue and market-share [38] Rhee and Haunschild [39] study showed that automobile companies who have a strong market reputation experienced greater market share fall due to product recall announcements than those with weaker reputations Automotive recalls have caused decrease in market share of the involved company and if these recalls were "sufficiently surprising" that alters the customers" expectations then it would induce a shift toward more reliable alternatives The magnitude of shift would depend on the unexpectedness of the recall and the ability of the customer to identify more reliable alternatives. The decision on reliability is based on the customers" discernment on the product recall if it was due to brand specific characteristics, production processes, or even a country-specific input available to suppliers.…”