Should Ad Spending Increase or Decrease before a Recall Announcement? The Marketing–Finance Interface in Product-Harm Crisis Management

Abstract

Product recalls tend to damage the stock price of the recalling firm. This article proposes and empirically demonstrates that adjustments to prerecall advertising spending can be used as a tool to moderate this financial damage. Using data on automobile recalls and detailed advertising expenditures from 2005 to 2012, the authors show that adjustments to a firm's prerecall advertising expenditure can either mitigate or amplify the negative effect of the recall on stock market value, depending on the direction of advertising adjustment and the recall characteristics. Boosting ad spending before a recall announcement softens the stock price loss when the recall involves a newly introduced product with a minor hazard but sharpens the loss when the recalled product is an established model with a major hazard. Cutting prerecall advertising worsens the stock price loss when the recall involves a new product, regardless of the hazard. This research also reveals that in product-harm crisis management, profit maximization and shareholder value maximization can conflict with each other, underscoring the importance of developing an integrated crisis management strategy.