Crisis Management Strategies and the Long-Term Effects of Product Recalls on Firm Value

Abstract

Companies increasingly face product harm crises resulting in product recalls, which often have a negative impact on firm value. Whereas prior research has studied the short-term effects of product recalls on firm value, the authors of this article focus on the long-term effects. They develop a conceptual framework and hypotheses about the main effect of recall volume and the moderating effects of crisis management strategies on the relationship between recall volume and long-term firm value. They empirically test the hypotheses in the auto industry context using both short-term abnormal returns analysis and long-term calendar-time portfolio analysis of 280 product recalls during 2005–2015. The findings reveal that the negative impact of product recall volume lingers over time. Brand (promotion) advertising has a significant positive (negative) effect on the relationship between recall volume and long-term abnormal returns. Furthermore, both voluntary recall initiation and postrecall remedial efforts positively moderate the impact of recall volume on long-term returns. These moderating effects are contrary to those in the short term. The results suggest that managers should use different advertising types during and after a recall, strategically initiate recalls, and diligently prepare postrecall remedies to mitigate the negative effects of recall volume on long-term return.