The extant literature has studied the effects of a firm's service recovery efforts on the reactions of customers and employees following an individual service failure. However, the impact of recovery efforts on a firm's performance after a public and large service failure-such as a largescale information breach-has received scant attention. To address this gap, this current research develops a framework and finds support for the impact of service crisis recoveries on a firm's performance, as measured by firm-idiosyncratic risk. Using a unique dataset of service crisis recoveries, the authors find that firms offering compensation (i.e., tangible redresses) or process improvement (i.e., improvements in organizational processes) show more stable performance (less idiosyncratic risk), from two quarters to two calendar years after the announcement of their recovery plan. In line with the documented dual effect of apologies, firms that offer apology-based recoveries display more volatile performance (higher idiosyncratic risk). Of note, this volatility increases with the number of affected individuals, and it remains unaffected even when the apology is expressed with high intensity.
Building on the literatures on service failure and crisis seriousness, we develop a framework to understand the effects of a specific type of service crisis (i.e., data breaches) and organizational recovery resources on the reactions of the stock market. To do so, we conduct an event study analysis with a sample of 217 data breach announcements, as our empirical context. Our analyses reveal that a firm suffers from negative abnormal stock returns when either the outcome of the breach (e.g., the breach of financial data) or its causal process (e.g., hacker attack) indicates a high level of seriousness. Moreover, considering organizational recovery resources, we find that in the case of financial data breaches, age, size, profitability, liquidity, and brand familiarity are the primary resources that can help a firm’s recovery. For hacker attacks, these organizational recovery resources include size, profitability, and liquidity.
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