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The effect of a toy industry product recall announcement on shareholder wealth

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  • John Ni
  • Barbara B. Flynn
  • F. Robert Jacobs

Abstract

The widely publicised product recalls of lead-paint tainted toys in 2007 caused serious concerns among consumers, investors and the government. The widespread practice of global outsourcing in toy industry further intensifies consumers and investors’ uncertainties about toy safety. This paper assesses the stock market reaction to recent toy recall announcements. Based upon the theoretical underpinnings from agency theory, signalling theory and prospect theory, it also develops an understanding of factors that influence the direction and magnitude of the stock market reaction. One hundred and forty-five toy recall announcements in 2000–2014 were analysed using event study and linear regression. The results show that the announcement of a toy recall was associated with a negative stock market reaction. The stock market reaction was more negative for toy product recall announcements by retailers or distributors, smaller source firms, toys with more severe hazards and source firms with higher growth potential. This paper contributes to the product harm crisis literature by extending the automotive industry-based literature to toy industries and studying their unique features. It is important that toy industry managers are aware that the stock market penalty for a product recall increases with the degree of hazard. Moreover, toy companies, retailers and distributors with high growth potential should be aware of the signal sent by following a proactive recall strategy.

Suggested Citation

  • John Ni & Barbara B. Flynn & F. Robert Jacobs, 2016. "The effect of a toy industry product recall announcement on shareholder wealth," International Journal of Production Research, Taylor & Francis Journals, vol. 54(18), pages 5404-5415, September.
    • Handle: RePEc:taf:tprsxx:v:54:y:2016:i:18:p:5404-5415
    DOI: 10.1080/00207543.2015.1106608
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    3. Wood, Lincoln C. & Wang, Jason X. & Olesen, Karin & Reiners, Torsten, 2017. "The effect of slack, diversification, and time to recall on stock market reaction to toy recalls," International Journal of Production Economics, Elsevier, vol. 193(C), pages 244-258.
    4. Li, Huashan & Bapuji, Hari & Talluri, Srinivas & Singh, Prakash J., 2022. "A Cross-disciplinary review of product recall research: A stakeholder-stage framework," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 163(C).
    5. K. Katsaliaki & P. Galetsi & S. Kumar, 2022. "Supply chain disruptions and resilience: a major review and future research agenda," Annals of Operations Research, Springer, vol. 319(1), pages 965-1002, December.
    6. Woldt, Jason J. & Prasad, Sameer, 2022. "Crises in global supply chains: The role of impression management communications," International Journal of Production Economics, Elsevier, vol. 252(C).
    7. Zhang, Min & Hu, Haiju & Zhao, Xiande, 2020. "Developing product recall capability through supply chain quality management," International Journal of Production Economics, Elsevier, vol. 229(C).
    8. Rashid Ameer & Radiah Othman, 2023. "Stock market reactions to US Consumer Product Safety Commission enforcement actions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 3709-3735, September.
    9. Muralidharan, Etayankara & Hora, Manpreet & Bapuji, Hari, 2022. "Hazard severity and time to recall: Evidence from the toy industry," Journal of Business Research, Elsevier, vol. 139(C), pages 954-963.
    10. Yixin Zhang & Xifu Wang, 2021. "Optimal pricing and sourcing strategies in the presence of supply uncertainty and competition," Journal of Intelligent Manufacturing, Springer, vol. 32(1), pages 61-76, January.

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