On the Determinants, Financial and Operating Consequences, and the Product Market Effects of Product Recalls

67 Pages Posted: 6 Apr 2013

See all articles by Omesh Kini

Omesh Kini

Georgia State University

Jaideep Shenoy

University of Connecticut - Department of Finance

Venkat Subramaniam

Tulane University

Date Written: March 2013


We study a large sample of product recalls that include a wide variety of products such as consumer products, food, drug, medical devices, and automobiles and show that such product quality failures have significant adverse value consequences for the recalling firms. Our analysis sheds light on factors that affect the incidence of product recalls, the financial and operating consequences for the recalling firms, and the actions taken by them in response to the recall. We also study the value implications for the rivals and suppliers – which enable us to draw important inferences about product market linkages. We find that the financial condition, competitive position, coordination costs, incentives of workers and management, and monitoring environment impact recall likelihood. Recall events result in significant costs for key suppliers which are further exacerbated if they have made larger relationship-specific investments. Further, instead of benefiting from the recalling firms’ problems, industry rivals suffer adverse contagion effects, perhaps due to anticipated regulation and diminished perceptions about the product category. We find that a larger investment in brand capital alleviates the negative wealth effects for the recalling firms. Finally, using a difference-in-differences approach, we find that recalling firms suffer sales declines and increase advertising expenditures – consequences and policy changes that we further show are not just due to a continuation of a differential trend from before the recall event and, therefore, directly attributable to the recall.

Keywords: product market interactions, leverage, financial distress, incentive compensation, contagion, product recalls

JEL Classification: G32, G33, K13, L15

Suggested Citation

Kini, Omesh and Shenoy, Jaideep and Subramaniam, Venkat R., On the Determinants, Financial and Operating Consequences, and the Product Market Effects of Product Recalls (March 2013). Available at SSRN: https://ssrn.com/abstract=2246060 or http://dx.doi.org/10.2139/ssrn.2246060

Omesh Kini

Georgia State University ( email )

University Plaza
Atlanta, GA 30303-3083
United States
404-651-2656 (Phone)

Jaideep Shenoy (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Venkat R. Subramaniam

Tulane University ( email )

A.B. Freeman School of Business
New Orleans, LA 70118
United States
504-865-5493 (Phone)
504-862-8327 (Fax)

HOME PAGE: http://www.tulane.edu/~vencat

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