The financial impact of product recall announcements in China

Abstract

A product recall can be viewed as a firm’s worst nightmare. Although the long-term damage to brand equity and company reputation may be difficult, if not impossible, to quantify, the short-term impact on shareholders’ wealth is readily estimable. While many studies have examined this issue in the Western context, little is known about the financial impact of a product recall announcement in China. To advance the knowledge about the financial impact of a product recall announcement, we explore this issue using event study methodology. In general, our findings are congruent with previous research that product recalls result in negative abnormal returns. Interestingly, however, we found that Chinese companies suffered from greater financial losses than their Western counterparts did. This study also provides evidence that the Chinese food industry experiences a more severe stock market reaction than the automobile industry and that a passive recall strategy was associated with a more negative stock market reaction than a proactive recall strategy. We conclude with several future research avenues for global research on product recalls.