Does it Pay to Recall your Product Early? An Empirical Investigation in the Automobile Industry

Defective products are often recalled to limit harm to consumers and damage to the firm. However, little is known about why the timing of product recalls varies after an investigation is opened. Likewise, there is little evidence on whether recall timing affects stock markets. This study tests the effect of problem severity on time to recall, the role of brand characteristics in moderating this relationship, and the stock market impact of time to recall. The authors test the hypotheses on a sample of 381 recall investigations in the automobile industry between 1999 and 2012. The results show that although problem severity increases time to recall, this relationship is weaker when the brand under investigation (1) has a strong reputation for reliability and (2) has experienced severe recalls in the recent past. However, the relationship between problem severity and time to recall is stronger when the brand is diverse. Importantly, the results reveal that stock markets punish recall delays. The study suggests that time to recall has significant implications for managers and policy makers.

[1]  I. Geyskens,et al.  The performance implications of outsourcing customer support to service providers in emerging versus established economies , 2014 .

[2]  Rajan Varadarajan,et al.  Does success diminish competitive responsiveness? Reconciling conflicting perspectives , 2006 .

[3]  Barry Berman,et al.  Planning for the inevitable product recall , 1999 .

[4]  Erik Stafford,et al.  Managerial Decisions and Long-Term Stock Price Performance , 1999 .

[5]  高橋 進.  サイアート, マーチの「A Behavioral Theory of the Firm」 , 1995 .

[6]  H. Gatignon,et al.  Competitive Reactions to Market Entry: Explaining Interfirm Differences , 1989 .

[7]  Venkatesh Shankar,et al.  The Dynamic Impact of Product-Harm Crises on Brand Preference and Advertising Effectiveness: An Empirical Analysis of the Automobile Industry , 2015, Manag. Sci..

[8]  C. L. Chieng,et al.  The Corporate Social Responsibility of Pharmaceutical Product Recalls: An Empirical Examination of U.S. and U.K. Markets , 2007 .

[9]  Timothy B. Heath,et al.  Asymmetric Decoy Effects on Lower-Quality versus Higher-Quality Brands: Meta-analytic and Experimental Evidence , 1995 .

[10]  Pamela R. Haunschild,et al.  Learning from Complexity: Effects of Prior Accidents and Incidents on Airlines' Learning , 2002 .

[11]  Venkatesh Shankar,et al.  New Product Preannouncements and Shareholder Value: Don't Make Promises you Can't Keep , 2007 .

[12]  S. Zeger,et al.  Longitudinal data analysis using generalized linear models , 1986 .

[13]  Gary H. Chao,et al.  Quality Improvement Incentives and Product Recall Cost Sharing Contracts , 2009, Manag. Sci..

[14]  Linda Argote,et al.  A Behavioral Theory of the Firm - 40 Years and Counting: Introduction and Impact , 2007, Organ. Sci..

[15]  M. Pillutla,et al.  Impact of Product-Harm Crises on Brand Equity: The Moderating Role of Consumer Expectations , 2000 .

[16]  K. B. Hendricks,et al.  Quality awards and the market value of the firm: an empirical investigation , 1996 .

[17]  Thomas Kramer,et al.  The Impact of Product Recalls on Future Product Reliability and Future Accidents: Evidence from the Automobile Industry , 2013 .

[18]  Taylor Randall,et al.  Does Component Sharing Help or Hurt Reliability? An Empirical Study in the Automotive Industry , 2008, Manag. Sci..

[19]  Nicholas G. Rupp.  The Attributes of a Costly Recall: Evidence from the Automotive Industry , 2004 .

[20]  Florian Stahl,et al.  The Impact of Brand Equity on Customer Acquisition, Retention, and Profit Margin , 2012 .

[21]  Jan-Benedict E. M. Steenkamp,et al.  The Effect of CRM Outsourcing on Shareholder Value: A Contingency Perspective , 2012, Manag. Sci..

[22]  G. Carroll,et al.  Why the Microbrewery Movement? Organizational Dynamics of Resource Partitioning in the U.S. Brewing Industry1 , 2000, American Journal of Sociology.

[23]  Mooweon Rhee,et al.  The Liability of Good Reputation: A Study of Product Recalls in the U.S. Automobile Industry , 2006, Organ. Sci..

[24]  Sriram Thirumalai,et al.  Product Recalls in the Medical Device Industry: An Empirical Exploration of the Sources and Financial Consequences , 2011, Manag. Sci..

[25]  E. Duflo,et al.  How Much Should We Trust Differences-in-Differences Estimates? , 2001 .

[26]  M. Dekimpe,et al.  Weathering product-harm crises , 2008 .

[27]  V. Folkes,et al.  Buyers' and Sellers' Explanations for Product Failure: Who Done It? , 1986 .

[28]  Aleda V. Roth,et al.  Safety hazard and time to recall: The role of recall strategy, product defect type, and supply chain player in the U.S. toy industry , 2011 .

[29]  G. Siomkos,et al.  The Hidden Crisis in Product‐harm Crisis Management , 1994 .

[30]  M. Dekimpe,et al.  The Impact of a Product-Harm Crisis on Marketing Effectiveness , 2007 .

[31]  Mooweon Rhee,et al.  Does Reputation Contribute to Reducing Organizational Errors? A Learning Approach , 2009 .

[32]  Venkatesh Shankar,et al.  The Dynamic Impact of Product-Harm Crises on Brand Equity and Advertising Effectiveness: An Empirical Analysis of the Automobile Industry , 2012 .

[33]  Harald J. van Heerde,et al.  Rising from the Ashes: How Brands and Categories Can Overcome Product-Harm Crises , 2013 .

[34]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[35]  E. Fama.  Market Efficiency, Long-Term Returns, and Behavioral Finance , 1997 .

[36]  D. Hambrick,et al.  Speed, Stealth, and Selective Attack: How Small Firms Differ From Large Firms in Competitive Behavior , 1995 .

[37]  Peter M. Madsen,et al.  Failing to Learn? The Effects of Failure and Success on Organizational Learning in the Global Orbital Launch Vehicle Industry , 2010 .

[38]  Donald Hedeker,et al.  Longitudinal Data Analysis , 2006 .

[39]  Mooweon Rhee,et al.  The Role of Volition in Organizational Learning: The Case of Automotive Product Recalls , 2004, Manag. Sci..

[40]  Curtis R. Taylor,et al.  Who Initiates Recalls and Who Cares? Evidence from the Automobile Industry , 2003 .

[41]  Joel A. C. Baum,et al.  OPPORTUNITY AND CONSTRAINT: ORGANIZATIONS’ LEARNING FROM THE OPERATING AND COMPETITIVE EXPERIENCE OF INDUSTRIES , 1997 .

[42]  Kenneth C. Wilbur,et al.  Should Ad Spending Increase or Decrease before a Recall Announcement? The Marketing–Finance Interface in Product-Harm Crisis Management , 2015 .

[43]  Brent R. Moulton.  Random group effects and the precision of regression estimates , 1986 .

[44]  Sheridan Titman,et al.  On Persistence in Mutual Fund Performance , 1997 .

[45]  S. Dani,et al.  Fragile food supply chains: reacting to risks , 2010 .

[46]  Rajdeep Grewal,et al.  Strategic Responses to New Technologies and Their Impact on Firm Performance , 2004, Journal of Marketing.

[47]  Stanislav D. Dobrev.  Decreasing Concentration and Reversibility of the Resource Partitioning Process: Supply Shortages and Deregulation in the Bulgarian Newspaper Industry, 1987-1992 , 2000 .

[48]  Prasad A. Naik,et al.  Optimal Advertising When Envisioning a Product-Harm Crisis , 2010, Mark. Sci..

[49]  J. Quelch,et al.  A Strategic Approach to Managing Product Recalls , 1996 .

[50]  Erik Rolland,et al.  The design of reverse distribution networks: Models and solution procedures , 2003, Eur. J. Oper. Res..

[51]  Christopher S. Tang.  Making products safe: process and challenges , 2008 .

[52]  Yong Liu,et al.  Does a Firm's Product-Recall Strategy Affect Its Financial Value? An Examination of Strategic Alternatives during Product-Harm Crises , 2009 .

[53]  M. Dekimpe,et al.  The Market Valuation of Internet Channel Additions , 2002 .

[54]  S. Sitkin.  Learning Through Failure : The Strategy of Small Losses , 1992 .

[55]  Barry M. Staw,et al.  Threat-rigidity effects in organizational behavior: A multilevel analysis. , 1981 .

[56]  A. Marucheck,et al.  Product safety and security in the global supply chain: Issues, challenges and research opportunities , 2011 .

[57]  Ken G. Smith,et al.  Organizational Information Processing, Competitive Responses, and Performance in the U.S. Domestic Airline Industry , 1991 .

[58]  Gerard J. Tellis,et al.  Halo (Spillover) Effects in Social Media: Do Product Recalls of One Brand Hurt or Help Rival Brands? , 2016 .

[59]  Morgan Swink,et al.  How firm innovativeness and unexpected product reliability failures affect profitability , 2015 .

[60]  Kevin Lane Keller.  Conceptualizing, Measuring, and Managing Customer-Based Brand Equity , 1993 .

[61]  E. Duflo,et al.  How Much Should We Trust Differences-in-Differences Estimates? , 2001 .

[62]  Sam Peltzman,et al.  The Impact of Product Recalls on the Wealth of Sellers , 1985, Journal of Political Economy.

[63]  Karl T. Ulrich,et al.  Component Sharing in the Management of Product Variety: a Study of Automotive Braking Systems , 1999 .

[64]  J. Lemmink,et al.  Negative Spillover in Brand Portfolios: Exploring the Antecedents of Asymmetric Effects , 2008 .

[65]  M. Shubik,et al.  A Behavioral Theory of the Firm. , 1964 .

[66]  K. Train,et al.  A Control Function Approach to Endogeneity in Consumer Choice Models , 2010 .