Stock price reactions to product recall announcement : a study of U.S. listed firms.

Abstract

Product recalls in general may entail far-reaching losses and consequences for firms that conducted them. In this study, we examine the impact of product recall announcements on shareholders’ wealth, as represented by respective firms’ abnormal returns of the stocks during the recall period. The study analyses 298 consumer product firms which had issued product recall announcement between January 2001 and December 2009, as recorded in the U.S. Consumer Product Safety Commission (CPSC) website. The effects of these announcements on each firm’s stock price are then examined.

Consistent with previous studies, we find a significant negative abnormal return upon the announcement of the recall. This is especially so among the electronics industry. The results further reveal that it is the value of recall, rather than the degree of responsiveness or the severity of the product-harm crisis, that significantly affects the variation in the cumulative abnormal returns. Furthermore, we find that when firms delay the recall, the negative impact of the value of recall on stock prices is magnified.