The Impact of Product Recalls on Future Product Reliability and Future Accidents: Evidence from the Automobile Industry

Abstract

Although the goal of a product recall program is to enhance safety, there is little known about whether firms learn from product recalls. This study tests the direct effect of product recalls on future accidents and future recall frequency and indirect effect through future product reliability in the automobile industry. The hypotheses are tested on 459 make-year observations involving 27 automobile makers between the period 1995 and 2011. The findings suggest that increases in recall magnitude lead to decreases in future number of injuries and recalls. This effect, in turn, is partially mediated by future changes in product reliability. The results also suggest that the positive relationship between changes in recall magnitude and changes in future product reliability is 1) stronger for firms with higher shared product assets and 2) weaker for brands of higher prior quality. The findings are robust across alternate measures and alternate model specifications and offer valuable insights for managerial practice and public policy.

Keywords: product recalls, product reliability, accidents, shared product assets, prior brand quality