What Drives a Firm’s Choice of Product Recall Remedy? The Impact of Remedy Cost, Product Hazard, and the CEO

Angela Xia Liu, Yong Liu, & Ting Luo
Article Snapshot
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Key Takeaways

​Companies are more likely to provide full remedy for more severe product hazards, they tend to avoid full remedy when remedy cost is high.

Full remedy is less likely to be provided when the CEO receives greater cash compensation or less equity incentive, and when the CEO has longer tenure in the position.

The CEO’s financial interests further moderate the effects of remedy cost and consumer harm.

Article Snapshots: Executive Summaries from the Journal of Marketing

We find that during product recalls, companies' recall remedy decisions are influenced not only by remedy cost and consumer harm but also by the CEOs’ personal financial interests.

“This is the first paper to offer and test a theoretical framework that considers the trade-off between remedy cost to the company and consumer harm when companies make remedy decisions.”

Research

This paper examines what drives companies to provide a better or worse remedy to consumers. Substantively, understanding the drivers of recall remedy is critical because remedy has significant impacts on company performance metrics. Different from previous literature on product recall, our focus is on the determinants of remedy, an issue that has not been explored in the product recall context. A central theme of this article is that remedy decisions are influenced not only by recall and company characteristics but also by the incentives of top executives. 


“We delve into the ‘people’ aspect of remedy strategy by analyzing the impacts of CEO compensation and tenure. Our findings have important implications for recall strategy, consumer welfare and public policy, and leadership ethics.”​

Method

We study the determinants of companies' recall remedy decisions. The data were collected from the Consumer Product Safety Commission (CPSC) website (www.cpsc.gov/​). The recalls occurred from January 1996 to December 2007 and include a wide range of consumer products such as toys, household products, and sporting products.

​​Findings

We find that companies prefer to avoid full remedy when remedy cost is high, yet they are more likely to provide full remedy for more severe product hazards. We also find the CEO’s personal interests interfere with remedy decisions: full remedy is less likely when the CEO receives greater cash compensation or less equity incentive and when the CEO has a longer tenure in the position. Importantly, the CEO’s financial interests further moderate the effects of remedy cost and consumer harm.

 Determinants of Companies’ Remedy Decisions

This graph shows that the companies' remedy decisions are driven by the cost of remedy, consumer harm, and CEO characteristics including compensation and tenure. The CEO characteristics further moderate the impact of remedy cost and consumer harm.​


Implications

Our findings illustrate the fundamental conflicts companies have in balancing remedy cost and consumer harm when making remedy decisions. Companies should put greater emphasis on full remedy so that the important long-term benefit through consumer satisfaction and trust can be obtained. Because CEOs' financial interests influence remedy decisions, companies should be careful when designing their compensation packages. Government agencies should also pay attention to recall remedy to protect consumers.


 

Questions for the Classroom

  • What drives companies' remedy decision during product recalls?
  • Does a CEO's personal interest play a role in the remedy to consumers?
  • How company balance the tradeoffs between remedy cost and harm during product recall?


Full Article
Angela Xia Liu, Yong Liu, and Ting Luo (2016) What Drives a Firm’s Choice of Product Recall Remedy? The Impact of Remedy Cost, Product Hazard, and the CEO. Journal of Marketing: May 2016, Vol. 80, No. 3, pp. 79-95.
doi: http://dx.doi.org/10.1509/jm.14.0382



Angela Xia Liu is Associate Professor of Marketing, School of Economics and Management, Tsinghua University (e-mail: liux@sem.tsinghua.edu.cn).

 



Yong Liu is Associate Professor of Marketing and Gary M. Munsinger Chair in Entrepreneurship and Innovation, Eller College of Management, University of Arizona (e-mail: yoliu@eller.arizona.edu).



Ting Luo is Associate Professor of Accounting, School of Economics and Management, Tsinghua University (e-mail: luot@sem.tsinghua.edu.cn).


Author Bio:

 
Angela Xia Liu, Yong Liu, & Ting Luo
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