Does a firm's product-recall strategy affect Its financial value? An examination of strategic alternatives during product-harm crises

Yubo Chen, Shankar Ganesan, Yong Liu

Research output: Contribution to journalArticle

211 Scopus citations

Abstract

Product-harm crises often result in product recalls, which 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, the authors examine the impact of these strategic alternatives on firm value using Consumer Product Safety Commission recalls during a 12-year period from 1996 to 2007. Using the event study method, the authors show that regardless of firm and product characteristics, proactive strategies have a more negative effect on firm value than more passive strategies. An explanation for this surprising result is that the stock market interprets proactive strategies as a signal of 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 must be sensitive to how investors might interpret a proactive strategy and be aware of its potential drawbacks.

Original languageEnglish (US)
Pages (from-to)214-226
Number of pages13
JournalJournal of Marketing
Volume73
Issue number6
DOIs
StatePublished - Nov 1 2009

Keywords

  • Crisis management
  • Event study
  • Firm financial value
  • Firm reputation
  • Proactive and passive strategies
  • Product recalls

ASJC Scopus subject areas

  • Business and International Management
  • Marketing

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