Does It Pay to Recall Your Product Early? An Empirical Investigation in the Automobile Industry

Meike Eilert, Satish Jayachandran, Kartik Kalaignanam and Tracey A. Swartz
Article Snapshot
Current average rating    
Key Takeaways

What? Many companies often wonder if it pays to recall a product early.

So What? Stock market reacts negatively to time to recall even after controlling for the severity of the problem and size of the recall.

Now What? Marketers should be aware that advocating early for a recall is not only valuable for customer safety, but also stock market value.

Full Article

Article Snapshot: Executive Summaries from the Journal of Marketing

A team of researchers from the University of Kentucky and University of South Carolina find that the brand’s structural position impacts the time taken by firms to recall when faced with severe problems. While brand’s reputation for reliability and recent recall intensity shortens the time to call, brand diversification increases the time to recall.


We contribute to the product recall literature by examining time to recall when firms face safety investigations by external entities and its stock market outcomes.

We find significant variation in time to recall decisions for severe problems - brand reliability reputation and past recall intensity shortens time to recall, while brand diversification increases time to recall.


Research Question

In 2012, Toyota was fined $17.35 million dollars for delaying a floor mat recall. The U.S. Department of Justice fined General Motors $900 million for willfully delaying the recall for a faulty ignition switch. While we know that product recalls are adverse events, there is precious little known about why some firms recall early iand whether stock markets care about the time taken by firms to recall.Our thesis is that the time to recall when faced with severe problems is contingent on a brand's structural position and stock markets do care about recall timing over and above the event itself.

Methods

We compiled a dataset of 381 recall investigations in the United States automobile industry between 1999 and 2012 to test our hypotheses.This dataset was supplemented with data from numerous sources. We modeled time to recall model using a Weibull Accelerated Failure Time regression framework. We accounted for endogeneity in the stock market response model using a control function approach.

Findings

We find that although firms in general take a longer time to recall when the problem is severe, there are three critical factors that significantly shorten or lengthen the time to recall. Brands that are reliable and that have experienced a recall in the immediate past tend to recall earlier. However, diverse brands that target a broader spectrum of customers take a longer time to recall. Importantly, stock market reacts negatively to time to recall even after controlling for the severity of the problem and size of the recall.

Implications

It is important to understand the time taken by firms to respond to significant safety problems. Managers need to be aware that recalling early into an investigation is important for stakeholders such as customers and stock markets. Moreover, our study should encourage researchers to include recall timing variable when examining stock reactions to product harm crises. Finally, our study offers guidance to policy makers in the automotive industry by highlighting cases when firms might be slow to recall even in the face of severe problems.

Questions for the Classroom

  • Why don't firms respond to a potential product safety issue by immediately issuing a recall? 

  • Why does the stock market react negatively to time to recall? 

  • Why are some firms able to respond faster to a potential product safety issue than others?


Article Citation: Meike Eilert, Satish Jayachandran, Kartik Kalaignanam, and Tracey A. Swartz (2017) Does It Pay to Recall Your Product Early? An Empirical Investigation in the Automobile Industry. Journal of Marketing: May 2017, Vol. 81, No. 3, pp. 111-129.

doi: http://dx.doi.org/10.1509/jm.15.0074



Author Bio:

 
Meike Eilert, Satish Jayachandran, Kartik Kalaignanam and Tracey A. Swartz
Meike Eilert is Assistant Professor, Gatton College of Business and Economics, University of Kentucky (e-mail: meike.eilert@gmail.com). Satish Jayachandran (contact author) is James F. Kane Professor of Business (e-mail: satish@moore.sc.edu), Kartik Kalaignanam is Associate Professor (e-mail: kartik.kalaignanam@moore.sc.edu), and Tracey A. Swartz is a doctoral candidate (e-mail: tracey.swartz@grad.moore.sc.edu), Darla Moore School of Business, University of South Carolina. The first three authors contributed equally.
Add A Comment :
 

Become a Member
Access our innovative members-only resources and tools to further your marketing practice.