Reports

Crisis Management Strategies and the Long-term Effects of Product Recalls on Firm Value

Yan Liu, Venkatesh Shankar, and Wonjoo Yun, 2017, 17-121

Companies increasingly face product harm crises (e.g., Toyota car, Samsung Galaxy Note phablet, Blue Bell ice cream), resulting in product recalls that often have a negative impact on shareholder value. While we know something about the short-term effects of product recalls on shareholder value, not much is known about the long-term effects of recall volume and the moderating effects of crisis management strategies on the relationship between recall volume and long-term firm value.

Here, Yan Liu, Venkatesh Shankar, and Wonjoo Yun undertake the first study to investigate the effects of crisis management strategies on long-term shareholder returns to product recalls. They develop a conceptual framework and hypotheses about the main effect of recall volume and the moderating effects of crisis management strategies on the relationship between recall volume and long-term firm value.

They empirically test their hypotheses in the auto industry context using both short-term abnormal returns analysis and long-term calendar-time portfolio analysis of 280 product recalls during 2005-2015.

Findings

Overall, they find that brand advertising, voluntary initiation, and post-recall remedy mitigate the negative effects of recall on long-term returns and promotional advertising exacerbates recall effects on long-term returns.

Specifically, contrary to short-term effects, brand (promotional [e.g., rebate, financing deal, discount]) advertising has a significant positive (negative) effect on the relationship between recall volume and long-term abnormal returns. Furthermore, both voluntary recall initiation and post-recall remedial efforts positively moderate the impact of recall volume on long-term returns.

Implications

These results suggest that managers should use different advertising types during and after a recall, strategically initiate recalls, and diligently execute post-recall remedy. To ameliorate the negative effects of recall volume on long-term abnormal returns, the firm should first voluntarily initiate the recall. It should next spend its resources fixing the defects and then focus on brand advertising. These findings are general to all industries but apply in particular to automobiles and durables.   

Overall, this study suggests that managers and researchers should focus on the long term, rather than focus on short-term strategies, as proposed by prior research. The authors’ findings demonstrate that morally correct strategies such as voluntary initiation, post-recall remedial efforts, and demonstration of brand commitment are best for long-term shareholder value as well as for consumers who face a significant number of recalls of foods, toys, electronic devices, and automobiles.

Yan Liu is Assistant Professor of Marketing, Department of Marketing, and Venkatesh Shankar is Professor of Marketing, Coleman Chair in Marketing, and Director of Research, Center for Retailing Studies, both at Mays Business School, Texas A&M University. Wonjoo Yun is Assistant Professor of Marketing, Oakland University. The lead authors, Venkatesh Shankar and Yan Liu, contributed equally.

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