What drives a firm's choice of product recall remedy? The impact of remedy cost, product hazard, and the CEO

Angela Xia Liu, Yong - Liu, Ting Luo

Research output: Contribution to journalArticlepeer-review

24 Scopus citations

Abstract

When product recalls occur, companies provide corrective or compensation measures to consumers for the defective products they have purchased. These remedies directly affect consumers and the effectiveness of recall. This article examines the determinants of remedy choices with a theoretical framework rooted in the basic trade-off between remedy cost and consumer harm. In addition to recall and company characteristics, the authors also consider the impact of the CEO's personal incentives. Using recalls issued by the U.S. Consumer Product Safety Commission, the authors find that companies prefer to avoid full remedy when remedy cost is high, yet they are more likely to provide full remedy for more severe product hazards. The results show that CEOs' personal interests interfere with remedy decisions: full remedy is less likely when the CEO receives greater cash compensation or less equity incentive, and when the CEO has longer tenure in the position. Importantly, the CEO's financial interests further moderate the effects of remedy cost and consumer harm. The findings have important implications for recall strategy, consumer welfare, public policy, and leadership ethics.

Original languageEnglish (US)
Pages (from-to)79-95
Number of pages17
JournalJournal of Marketing
Volume80
Issue number3
DOIs
StatePublished - May 1 2016

Keywords

  • CEO incentive
  • Leadership ethics
  • Product recall
  • Product-harm crisis
  • Recall remedy

ASJC Scopus subject areas

  • Business and International Management
  • Economics and Econometrics
  • Marketing

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