Can Recalls be Painless? Impact of Product Recalls on the Recalling Firm and its Suppliers : New Findings from the Automotive Industry

Abstract

My thesis deals with the impact of product recalls on recalling firm and its suppliers, as well as possible actions that managers could undertake in order to protect firm’s market value.

In my thesis essay 1 I try to address two questions: First, how does the announcement of a large-scale product recall by a firm influence the value of their suppliers?, and what are the actions that supplying firm managers could undertake in order to protect their market value? The results showed that suppliers market value drops when one of their suppliers announce large scale recall. However, suppliers could mitigate these effects by disclosing the strength of relationship with their suppliers. The study offers several contribution for suppliers firm’s managers. First, it can create awareness to supplier firms’ managers that external shock (e.g. product recall) that affect their customers will be spill-overed to them. Second, by publically disclosing relationship with customer, supplier firms’ managers can protect firm’s market value.

In my essay 2 I try to understand why managers use two different types of recalls (one where they recall all defected product at once [chunk recalls] and second where managers recall affected products by two or more announcements [slice recalls]) and what is the impact of slicing and chunking on firm’s market value. The results showed that severity and size of the recall increase the probability of slicing announcements. Furthermore, on average, the stock market reacts more negatively to slicing than to chunking. However, for extremely large recalls, slicing proves less detrimental than chunking. The essay 2 offers important insight to managers: while dealing with product crisis, they should allocate resources in detecting the full scope of the problem (e.g. to detect all product affected by the same default). In that case, they could make only one recall announcement, which could protect firm’s market value.

However, if the scope of the crisis is extremely large (e.g. large number of products are affected by the same defect), managers should aim to make several smaller recall announcements.