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The spillover effect of product recalls on competitors’ market value: The role of corporate product reliability

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  • Liu, Dong
  • Varki, Sajeev

Abstract

Prior studies on product recalls have found that product recalls hurt the recalling firm’s market value. However, little is known about how a product recall affects the market value of the recalling firm’s competitors. It is not clear whether a recall helps or hurts the market value of the recalling firm’s competitors. Using data from the US automobile industry, we find that a product recall by a firm with high corporate product reliability hurts the market value of its competitor (negative spillover). Corporate product reliability refers to a firm’s reputation for providing reliable products. However, the negative spillover effect is buffered or attenuated by the corporate product reliability of the competitor. Further, the negative spillover effect of a recall on a competitor’s market value can be detected even when the competitor makes a positive announcement in the form of a new product pre-announcement (NPPA) after a recall in the industry. This effect is again attenuated by the strength of the competitor’s corporate product reliability.

Suggested Citation

  • Liu, Dong & Varki, Sajeev, 2021. "The spillover effect of product recalls on competitors’ market value: The role of corporate product reliability," Journal of Business Research, Elsevier, vol. 137(C), pages 452-463.
    • Handle: RePEc:eee:jbrese:v:137:y:2021:i:c:p:452-463
    DOI: 10.1016/j.jbusres.2021.08.047
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