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

Abstract

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.

The more I err, the less I pay

“…Swift recalls or the time firms take to recall a defective product from the marketplace has been studied by scholars. While consequences of time to recall on stock market performance of the firm has been found to be negative (Eilert et al, 2017;Wood et al, 2017), scholars have shown that time to recall is influenced by firm-level factors (e.g., type of defects, supply chain position, recall strategy, and external agency pressure) and crisis factors (e.g., severity) (Eilert et al, 2017;Hora et al, 2011;Ni and Huang, 2017). Country of origin of imported products and components also were found to impact recall timing decisions (Majid and Bapuji, 2018;Muralidharan et al, 2015).…”

“…A few articles have also examined the antecedents of recalls, such as top management characteristics, governance, and plant operational parameters (Kashmiri and Brower, 2016;Shah et al, 2016). While these studies have greatly advanced our understanding of the causes and consequences of product recalls, prior research has not adequately examined product recall processes, i.e., actual recall behavior of a company during a recall crisis (Eilert et al, 2017;Ni and Huang, 2017).…”

Effect of Product-harm Crisis on Customer's Based Brand Equity: The Moderating Role of Attitude towards Brand

“…According to Eilert, Kalaignanam, Jayachandran, Swartz &Tracey ( [116]), Company recalled there malfunctioned products in order to minimize harm to target consumers and also loss to the company. Thus Eilert et al, [116] in their study investigate the effects of product recall on the stock market as well as time for recalling the effected product.…”

“…Thus Eilert et al, [116] in their study investigate the effects of product recall on the stock market as well as time for recalling the effected product. Also there research investigated the moderating role of brand characteristics on the relationship between the time to recall damage product and its effects on stock market.…”

“…Therefore, this sample does not truly depict consumer reactions to a PHC because of feelings of invincibility amongst younger consumers (Laufer et al, [104]).  The sample set also consists exclusively of business students, who have shown different attitudes than the general population (Benton, [115]; Ewert and Baker, [116]).  As well, the sample constituted more males than females.…”