Does a Firm's Product Recall Strategy Affects Its Financial Value? An Examination of Strategic Alternatives During Product-Harm Crises

Product-harm crises often result in product recalls that 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, we examine the impact of these strategic alternatives on firm value using Consumer Product Safety Commission recalls over twelve year from 1996 to 2007. Using the event study method, we show that regardless of firm and product characteristics, proactive strategies have a more negative effect on firm value when compared to more passive strategies. One explanation for this surprising result is that proactive strategies are interpreted by the stock market as a signal for 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 need to be sensitive to how investors may interpret a proactive strategy and be aware of its potential drawbacks