Does it Pay to Recall your Product Early? An Empirical Investigation in the Automobile Industry

Abstract

Defective products are often recalled to limit harm to consumers and damage to the firm. However, little is known about why the timing of product recalls varies after an investigation is opened. Likewise, there is little evidence on whether recall timing affects stock markets. This study tests the effect of problem severity on time to recall, the role of brand characteristics in moderating this relationship, and the stock market impact of time to recall. The authors test the hypotheses on a sample of 381 recall investigations in the automobile industry between 1999 and 2012. The results show that although problem severity increases time to recall, this relationship is weaker when the brand under investigation (1) has a strong reputation for reliability and (2) has experienced severe recalls in the recent past. However, the relationship between problem severity and time to recall is stronger when the brand is diverse. Importantly, the results reveal that stock markets punish recall delays. The study suggests that time to recall has significant implications for managers and policy makers.