In this era of numerous product and public relations crises (e.g., Toyota, Samsung Galaxy Note 7, Blue Bell ice cream, United Airlines, Goodman furnace), two Texas A&M University marketing professors investigated the effects of crisis management strategies on long-term shareholder returns to product recalls.
The study by Mays Business School professors Venkatesh Shankar and Yan (Lucy) Liu found that brand advertising, voluntary recall initiation, and post-recall remedial efforts help mitigate the negative effect of recalls on long-term shareholder returns. Promotional advertising exacerbates recall effect on long-term returns.
This contradicts the short-term strategies proposed by prior research.
“Our results suggest that managers should use different advertising types during and after a recall, strategically initiate recalls, and diligently prepare post-recall remedy to mitigate the negative effects of recall volume on long-run shareholder return,” Shankar explained.
Their findings are in a paper forthcoming in the Journal of Marketing.
The findings resonate with everyday consumers who face a significant number of recalls of foods, toys, electronic devices, and automobiles because they show that morally correct strategies such as voluntary initiation, post-recall remedial efforts, and demonstration of brand commitment are best for long-term shareholder value as well. Managers and researchers should focus on the long-term rather than being myopic. The findings are general to all industries, but apply in particular to automobiles and durables.
Companies increasingly face product harm crises, resulting in product recalls which often have a negative impact on firm value. While we know something about the short-term effects of product recalls on shareholder value, this article focuses on the long-term effects of recall volume and the moderating effects of crisis management strategies on the relationship between recall volume and long-term firm value. Based on an analysis of product recalls during 2005-2015 in the auto industry, the authors find that the negative impact of product recall volume lingers over time.
Brand promotion advertising has a significant positive or negative effect on the relationship between recall volume and long-term shareholder value. Furthermore, both voluntary recall initiation and post-recall remedial efforts positively moderate the impact of recall volume on long-term returns. These effects are contrary to the short-term effects.
Shankar can be reached at vshankar@mays.tamu.edu. He has been recognized as one among the World’s Most Influential Scientific Minds by Thomson Reuters and one of the Top 10 experts on innovation management worldwide. His bio is at http://mays.tamu.edu/directory/vshankar/
Liu can be reached at yliu@mays.tamu.edu and her bio is at http://mays.tamu.edu/directory/liu96/
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This story is posted on Texas A&M Today
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