Recall environment and post-recall stock market response

Abstract

When a firm announces a product recall it typically incurs a market penalty in the form of a decline in its stock price. But a specific recall announcement often happens among recalls by other firms in the industry. Could recent recalls by other firms in the industry impact the market penalty for a new recall announcement? To capture and test this effect, the authors conceptualize recall environment intensity. Using salience theory, they identify the dimensions of the recall environment intensity construct, confirm these dimensions using interviews and a survey, and develop a measure for the construct. The authors then develop hypotheses for the effect of recall environment intensity on the stock penalty for a new recall announcement and propose boundary conditions for the effect. The hypotheses are tested using data from the automobile industry to show that a firm that announces a recall in a high intensity recall environment will have a smaller decline in stock price, though the effect varies with the reliability reputation of the brand and the age of the recalled products. The study provides a nuanced understanding of the stock market response to recall announcements and offers guidance on how to conceptualize and measure recall environment intensity.