Does a Firm's Product Recall Strategy Affects Its Financial Value? An Examination of Strategic Alternatives During Product-Harm Crises

Journal of Marketing, 73 (6): 214-226, 2010

40 Pages Posted: 5 Sep 2015

See all articles by Yubo Chen

Yubo Chen

Tsinghua University, School of Economics & Management

Shankar Ganesan

University of Arizona - Department of Marketing

Yong Liu

University of Arizona

Date Written: January 1, 2009

Abstract

Product-harm crises often result in product recalls that can have a significant impact on a firm’s reputation, sales, and financial value. In managing the recall process, some firms adopt a proactive strategy in responding to consumer complaints while others are more passive. In this study, we examine the impact of these strategic alternatives on firm value using Consumer Product Safety Commission recalls over twelve year from 1996 to 2007. Using the event study method, we show that regardless of firm and product characteristics, proactive strategies have a more negative effect on firm value when compared to more passive strategies. One explanation for this surprising result is that proactive strategies are interpreted by the stock market as a signal for substantial financial losses to the firm. When a firm proactively manages a product recall, the stock market infers that the consequence of the product-harm crisis is sufficiently severe that the firm had no choice but to act swiftly to reduce potential financial losses. Therefore firms dealing with product recalls need to be sensitive to how investors may interpret a proactive strategy and be aware of its potential drawbacks.

Keywords: Product recalls, Firm financial value, Proactive and passive strategies, Firm reputation, Crisis management, Event study

Suggested Citation

Chen, Yubo and Ganesan, Shankar and Liu, Yong, Does a Firm's Product Recall Strategy Affects Its Financial Value? An Examination of Strategic Alternatives During Product-Harm Crises (January 1, 2009). Journal of Marketing, 73 (6): 214-226, 2010, Available at SSRN: https://ssrn.com/abstract=2655803

Yubo Chen

Tsinghua University, School of Economics & Management ( email )

Beijing, 100084
China

Shankar Ganesan

University of Arizona - Department of Marketing ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Yong Liu (Contact Author)

University of Arizona ( email )

1130 E Helen Street
Tucson, AZ 85721
United States

HOME PAGE: http://https://eller.arizona.edu/people/yong-liu

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