The Effect of Product Recalls on Stock Performance (Summary)

September 11, 2008 — By

In my paper, The Effect of Product Recall on Stock Performance, I discuss findings with regard to how much a
company’s stock price changes with the announcement of a product recall. I also discuss studies that show how negative
impacts can be mitigated. The full text
of the post can be found by clicking the link above. Here, I summarize my main findings.

  • On average, product recalls have a statistically
    significant, negative impact on a recalling-company’s stock price.

  • The industries most financially impacted by
    recalls are drugs, cosmetics, toys and appliances.
  • Loss of market share is the biggest cost of a
    recall.
  • A company’s reputation, both as a safe brand and
    as a responsible company, heavily influences sales and stock prices.
  • How a product recall is handled has at least
    as great an impact on a company’s reputation as does having to issue the recall
    in the first place.
  • Prompt, complete and direct recall notification can protect and even improve
    brand image, Corporate Social Responsibly (CSR) ratings and financial performance.

The bottom line is that while, in general, the market
responds negatively to product recalls, the effects are due to how the market
perceives a company’s ability to retain customers and maintain
sales.   The company’s reputation – both as a safe brand and as a
responsible company – help drive this perception, and therefore stock
performance, surrounding product recalls. The good news for companies is that making the
decision to recall a product does not mean resigning itself to either bad or
very-bad financial results. Conducting
an effective recall with the right messaging can not only protect its
financial performance but, in some cases, improve its position in the market.

If you would like more information about this research, please email me at: jennifer [at] WeMakeItSafer [dot] com.

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