The effect on stockholder wealth of product recalls and government action: The case of Toyota's accelerator pedal recall

Abstract

a b s t r a c tWe analyze the effect of Toyota's faulty accelerator pedal on stockholder wealth. Using the event study methodology, we show that a major recall in January of 2010 is associated with a 19% fall in the company's cumulative abnormal returns. Continued concerns that Toyota was unable to identify and adequately fix the problem prompted the National Highway Traffic Safety Administration to conduct its own investigation in March, 2010. The results of this government investigation exonerated the company and Toyota's cumulative abnormal returns rose by almost 9%. The Toyota case provides an opportunity to study a product recall with both company error and a government action that addressed concerns about the safety of the product.

Stock Market Reactions to Auto Manufacturers’ Environmental Failures

“…In contrast, the quality problems experienced by Toyota resulted in intense public scrutiny. First, there was the minor floor-mat recall (2007), a fatal highway accident (2009), a major Toyota recall (2011) and the release of a U.S. National Highway Traffic Safety Administration (NHTSA) report in 2011; these resulted in non-significant stock market reaction reactions (on the day of the event) of -0.77%, 0.5%, -0.6%, and a significant + 3.74% (Gokhale, Brooks, and Tremblay 2014). The investigation by the NHTSA found that there were "no electronic flaws in Toyota vehicles capable of [creating the] dangerous high-speed unintended acceleration incidents" (NHTSA 2016, para.…”

Analysis of Traceability Optimization and Shareholder’s Profit for Efficient Supply Chain Operation under Product Recall Crisis

“…Traceability optimization refers to how well recalled products are retrieved, which helps to minimize the impact of recall event. Large number of studies suggest that firms experience significant decline in firm's stock price [5]. Shin et al [7] show that minor recalls may produce no damage to the sales; however, major recalls show strong evidence of negative impact on stock price.…”

“…The average cost of recall in US companies is around $10 million. The revenue of the firm is immensely affected as a result of product recall [5], which may lead to serious outcomes. Furthermore, Kini et al [6] found that large amount of capital is invested during recall crisis, which further burden shareholders.…”

Information Technology System Failure and Value of Airlines: a Case Study of Airlines in 2016

“…In the auto industry, fixes proposed by manufactures through recalls suggest a significant decline in sales, loss of reputation and firm value (as an illustration, see Davidson and Worrell, 1992;Kini, Shenoy and Subramaniam, 2013;Gokhale et al, 2014b andRaghavan, 2015). However, it may not be logical to compare a differentiated oligopoly such as the auto market with the more concentrated passenger airline sector, in which travelers may not have as many options to buy the product due to constraints on schedules, airports, corporate tie-ups and sunk costs from frequent flier relationships or credit card relationships.…”