Learning About Product Quality: Automotive Recalls and Country Reputations
38 Pages Posted: 11 Dec 2012
Date Written: November 1, 2012
Abstract
Prior studies have argued that quality uncertainty for experience goods may be in part resolved by firm-specific reputational assets. This paper demonstrates that unobserved quality may also be signaled by a reputational asset common to many firms – country of origin. Analyzing stock market reactions to all published automotive recalls in the U.S. from 1966-2011, I find evidence that consumers learn about product quality both through historic experience with firms and country of origin. I estimate that firms whose products are recalled initially experience abnormal returns of −0.6%, and that these abnormal returns diminish with each subsequent recall. Further, I find significant intra-country spillovers of −0.15% during recall announcements. These results have implications for firms’ willingness to invest in quality and may lend insight into the perceived country-specific quality observed in the automotive industry.
Keywords: Product Recalls, Automobiles, Reputation Formation, Country of Origin
JEL Classification: D8, L14, L62
Suggested Citation: Suggested Citation