The Liability of Good Reputation: A Study of Product Recalls in the U.S. Automobile Industry

Abstract

In this paper, we explore how a firm's reputation affects both the reaction of the market to that firm's product defects, as well as the firm's learning response. In contrast to a variety of arguments set out by information economists and market sociologists claiming that reputation serves as an organizational asset, we explore the possibility that reputation can be an organizational liability. We propose that a good reputation is less advantageous than a poor reputation in absorbing the impact of product defects, and thus high reputation firms are more likely to be punished by the market. We also propose, however, that this liability is transformed into a future asset by providing high reputation firms with more incentives to learn from these mistakes, and thus reduce their subsequent defect rate. Low reputation firms are also incented to learn, which means that moderate-reputation firms are likely to have the greatest problems learning from these defects. We empirically test these propositions using data on product recalls in the U.S. automobile industry from 1975 to 1999, and find support for predicted relationships. High reputation firms are punished more than low reputation firms, and learning from product recalls has an inverted U-shaped relationship with firm reputation. We conclude with a discussion of the implications of these results for learning and organizational status/reputation theories.

Does Corporate Social Responsibility Put Reputation at Risk by Inviting Activist Targeting? An Empirical Test among European SMEs

“…While most papers look at the positive effects of CSR, others look at the potential negative reputational effects (Rhee and Haunschild, 2006;Wagner et al, 2009;De Vries et al, 2015). King and McDonnell (2012) challenged the insurance-like capability of CSR by pointing at the so-called reputational liability effect.…”

“…Companies that express commitment to CSR raise expectations among their stakeholders and become obligated to uphold their commitment (Joyner and Payne, 2002). Stakeholders will react more negatively when such a firm is found to lack behind (Rhee and Haunschild, 2006;Wagner et al, 2009). Testing their model on 157 publicly traded firms that were boycotted during 1990-2005 and 471 comparable firms, King and McDonnell (2012) indeed found that firms in the highest tier of Fortune's Most Admirable Firms Index are significantly more likely to be targeted.…”

Toward a Comprehensive Understanding of Corporate Reputation: Concept, Measurement and Implications

“…Walker (2010) divided corporate reputation definitions into 5 groups: (1) perceptual definitions which focus on defining corporate reputation as stakeholder's viewpoints about the overall perceptions regarding both internal and external aspects about an organization, (2) aggregate definitions which is a collective perspective which is based on the perceptions of all stakeholder groups about an organization, (3) comparative definitions which compares reputation to other competitors in the market, (4) positive or negative definitions which means that reputation can be either positive or negative, and (5) temporal definitions which means that reputations are time-specific and can change over time (Gray and Balmer 1998, Mahon 2002, Rhee and Haunschild 2006.…”

Consumer, Investor, and Combined Reactions Following Product-Harm Crises

“…For example, PHCs and product recalls can exert harsh financial punishments on firms resulting in negative effects on their revenues, stock prices, and market share (e.g., Rhee & Haunschild 2006;Van Heerde, Helsen, & Dekimpe 2007). Chen, Ganesan, & Liu (2009) point to the example of the pharmaceutical sales and research and development firm Merck that initiated a recall in 2004 of its arthritis drug Vioxx.…”