Evaluating the costs of meat and poultry recalls to food firms using stock returns

Food recalls have been an issue of great concern in the food industry. Stakeholder responses to food safety scares can cause significant economic losses for food firms. Assessing the overall impact that may result from a food recall requires a thorough understanding of the costs incurred by firms. However, a direct measurement of a firm’s total private costs and losses of revenue associated with a food recall requires firm-level data that is not available. The method utilized in this study overcomes this limitation. Using an event study, the impact of meat and poultry recalls is quantified by analyzing price reactions in financial markets. A unique contribution of this study is evaluating whether recall and firm specific characteristics are economic drivers of the magnitude of impact of recalls on stock prices. On average, shareholders’ wealth is reduced by 1.15 percent, equivalently to $109million, within 5days after a firm is implicated in a recall involving a serious food safety hazard. However, when recalls involve less severe hazards, stock markets do not react negatively. Firm size, firm’s experience handling a recall, media information and recall size are drivers of the economic impact of meat and poultry recalls. Findings from this study provide essential information to the meat industry. In particular, understanding the likely impact of food recall events is critical for firms investing in food safety technologies and protocols.