Do CEO Characteristics Matter in Product Recalls?

Abstract

This study examines the effect of CEO characteristics such as gender, age, tenure, functional background, stock ownership, compensation scheme and dual role on the stock market returns of automobile companies, around the announcement of product recalls. Using an event study, for a sample of 2,576 product recalls in the US automobile industry, between January 2010 and June 2021, we observe that the stock market’s reaction to a product recall announcement is negative. However, the impacts on the cumulative abnormal returns around the announcement of product recalls of the company’s CEO being female, the CEO tenure, the CEO having an operations or marketing background, the ratio of CEO long-term compensation to total compensation and the CEO and Chairperson being the same person are all positive and statistically significant, showing that these CEO characteristics mitigate the negative effects on a company’s financial value caused by product recalls.

Keywords:

• Product recall
• stock market reaction
• event study
• CEO characteristics
• automobile industry

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Mayo et al. (2022) refer to other recall-intensive industries: medical device firms initiated one recall every four months on average (FDA 2019); pharmaceutical firms initiated one recall every six months on average (FDA 2019); and food firms initiated one recall every eight months on average (FDA 2019; USDA 2019).

2 The authors say that this behaviour of the media tends to be more intense in the case of recalls with severe defects and a higher volume of products. The authors conclude that some newspapers tend to be captured by automobile firms, and as such, there tends to be a bias in the provision of information, affected by the firm’s history of advertising in the newspaper. Consequently, there tends to be no direct link between the severity or volume of defective products and media coverage.

3 Available here: https://www.nhtsa.gov/recalls. At the same time, the link www.cars.com/research/acura/recalls/ was used to confirm that all recalls were collected.

4 Available here: https://brandirectory.com/rankings/auto/.

5 Reilly and Hoffer (1983) classified vehicle defects resulting from product recalls into three different classes, based on the level of severity for the consumer: Class I: death or severe injury caused by road accidents or fire, or risks that can be devastating; Class II: minor or moderate injury caused by road accidents or fire; Class III: defects that do not cause any road accidents or fires.

6 The ranking assigns a value of 1 to the company with the best ranking, and so on. Therefore, a negative relationship between this variable and abnormal returns is to be expected since companies with highly reputable brands have low values for this variable.

Additional information

Funding

This paper is financed by Portuguese national funds through FCT – Fundação para a Ciência e a Tecnologia, I.P., projects numbers UIDB/00685/2020 and UIDB/04007/2020.