Does it Pay to Recall Your Product Early? An Empirical Investigation in the Automobile Industry

Abstract

Defective products are often recalled to limit harm to consumers and damage to the firm. However, little is known about why the timing of product recalls varies across firms after an investigation is opened. Likewise, there is little evidence on how the timing of product recalls impacts firm performance. This study tests the effect of problem severity on time to recall and the contingent role of brand characteristics in moderating this relationship. The hypotheses are tested on a sample of 381 recall investigations conducted in the automobile industry between 1999 and 2012. The results show that while problem severity increases time to recall, this relationship is weaker when the brand under investigation has a) a strong reputation for reliability and b) experienced severe recalls in the recent past. However, the positive effect of problem severity on time to recall is stronger when brands are diverse. Importantly, the findings reveal that on average higher times to recall are punished by stock markets. The study suggests that time to recall has significant consequences for managers and policy makers.

Keywords: Product recalls, time to recall, brand reliability, brand diversification, stock market performance