The Impact of Product Recall Announcements on Stock Market Reaction: a Study of Chinese Listed Companies

Abstract

Product recalls can be viewed as a firm or nation’s worst nightmare. Though the magnitude of the loss of brand equity and reputation due to a recall is difficult to directly estimate, the impact of a recall on shareholder wealth is more easily quantified. Based on a sample of 29 product recall announcements by Chinese listed companies during the period 2002 to 2008, the effects of the stock market reaction to them was examined. Consistent with previous research in the United States market, we found a significant negative abnormal return in the Chinese market, but also found that Chinese companies suffered greater financial losses from product recalls. The results also revealed that Chinese companies in the food industry experienced more severe reactions from their recall announcements, while companies in automobile industry experienced a less severe reaction in their stock prices. We briefly describe the case of the melamine tainted milk crisis in China and investigate the stock market reaction, for both affected companies and their competitors. The results show that all of the affected companies suffered from significant negative financial losses, while their competitors benefitted from the recall.