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Product Recalls in the Medical Device Industry: An Empirical Exploration of the Sources and Financial Consequences

Author

Listed:
  • Sriram Thirumalai

    () (David Eccles School of Business, University of Utah, Salt Lake City, Utah 84112)

  • Kingshuk K. Sinha

    () (Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455)

Abstract

Medical devices play an increasingly significant role in the delivery of health care today. However, persistent quality problems with medical devices and the associated recalls present potential health risks to patients and personnel using these devices. This study addresses three key issues in this regard. First, it empirically assesses the financial implications of medical device recalls to understand if these consequences are severe enough to deter firms from introducing potentially hazardous medical devices into the market, as can be inferred from the literature. Second, the study considers a cross section of medical device manufacturers to examine the effect of firm characteristics on the costs of poor quality. Third, in an attempt to explore the sources of recalls, this study investigates firm characteristics that are likely to be associated with device recalls. The econometric analyses in the study are based on data from manufacturers in the medical device industry over a four-year period (2002-2005). Contrary to our expectations, the findings of the study indicate that at an aggregate level, the market penalties for medical device recalls are not significant, i.e., at the aggregate level, the costs of poor quality are not severe. Furthermore, we find that the magnitude of financial consequences of device recalls is affected by the product scope, sales, growth prospects, and the capital structure of a firm. In our analyses exploring the sources of device recalls, we find that firms with a research and development focus, developing broader product portfolios, have a higher likelihood of device recalls. Also, we find that the likelihood of recalls decreases with prior recall experience, indicating the presence of learning. Implications of the study findings, limitations, and directions for future research are identified. This paper was accepted by Sampath Rajagopalan, operations and supply chain management.

Suggested Citation

  • Sriram Thirumalai & Kingshuk K. Sinha, 2011. "Product Recalls in the Medical Device Industry: An Empirical Exploration of the Sources and Financial Consequences," Management Science, INFORMS, vol. 57(2), pages 376-392, February.
  • Handle: RePEc:inm:ormnsc:v:57:y:2011:i:2:p:376-392
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    File URL: http://dx.doi.org/10.1287/mnsc.1100.1267
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    References listed on IDEAS

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    Cited by:

    1. Ni, John Z. & Flynn, Barbara B. & Jacobs, F. Robert, 2014. "Impact of product recall announcements on retailers׳ financial value," International Journal of Production Economics, Elsevier, vol. 153(C), pages 309-322.
    2. repec:spr:custns:v:4:y:2017:i:1:d:10.1007_s40547-017-0074-y is not listed on IDEAS
    3. repec:eee:jebusi:v:93:y:2017:i:c:p:62-79 is not listed on IDEAS
    4. repec:eee:ijrema:v:33:y:2016:i:1:p:59-77 is not listed on IDEAS
    5. Adam J. Wowak & Michael J. Mannor & Kaitlin D. Wowak, 2015. "Throwing caution to the wind: The effect of CEO stock option pay on the incidence of product safety problems," Strategic Management Journal, Wiley Blackwell, vol. 36(7), pages 1082-1092, July.
    6. repec:bla:jscmgt:v:53:y:2017:i:4:p:13-36 is not listed on IDEAS
    7. Chen, Yi-Su & Su, Hung-Chung & Ro, Young K., 2017. "The co-evolution of supplier relationship quality and product quality in the U.S. auto industry: A cultural perspective," International Journal of Production Economics, Elsevier, vol. 184(C), pages 245-255.
    8. Hong, Yoo Suk & Huh, Woonghee Tim & Kang, Changmuk, 2017. "Sourcing assemble-to-order inventories under supplier risk uncertainty," Omega, Elsevier, vol. 66(PA), pages 1-14.
    9. Yan Dong & Kefeng Xu & Yi Xu & Xiang Wan, 2016. "Quality Management in Multi-Level Supply Chains with Outsourced Manufacturing," Production and Operations Management, Production and Operations Management Society, vol. 25(2), pages 290-305, February.
    10. repec:eee:proeco:v:193:y:2017:i:c:p:244-258 is not listed on IDEAS

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