Journal Article

What Drives a Firm's Choice of Product Recall Remedy? The Impact of Remedy Cost, Product Hazard, and the CEO

Liu, Yong, Liu, Angela Xia, Luo, Ting

2016

Overview

When product recalls occur, companies provide corrective or compensation measures to consumers for the defective products they have purchased. These remedies directly affect consumers and the effectiveness of recall. This article examines the determinants of remedy choices with a theoretical framework rooted in the basic trade-off between remedy cost and consumer harm. In addition to recall and company characteristics, the authors also consider the impact of the CEO's personal incentives. Using recalls issued by the U.S. Consumer Product Safety Commission, the authors find that companies prefer to avoid full remedy when remedy cost is high, yet they are more likely to provide full remedy for more severe product hazards. The results show that CEOs' personal interests interfere with remedy decisions: full remedy is less likely when the CEO receives greater cash compensation or less equity incentive, and when the CEO has longer tenure in the position. Importantly, the CEO's financial interests further moderate the effects of remedy cost and consumer harm. The findings have important implications for recall strategy, consumer welfare, public policy, and leadership ethics.

• Publisher: American Marketing Association,SAGE Publications,SAGE PUBLICATIONS, INC
• Subject: Automobile manufacturers / Brands / Business entities / Cash / Chief executive officers / Consumer goods / Consumer goods industries / Consumers / Cost of equity / Defective products / Government agencies / Health hazards / Product recalls / Stock prices / Studies