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Recalls Can Really Hurt Says Prize-Winning Study
May, 2003
STANFORD GRADUATE SCHOOL OF BUSINESS—When an automobile manufacturer has to recall a model for safety defects, the recall hurts sales of that company's cars the following month, according to a new study. The study found not all firms suffered the same size sales slump. Companies with the best reputations for quality, such as Lexus and Toyota, are hurt more by a recall than those companies with poorer reputations.
Conducted by doctoral candidate Mooweon Rhee at the Stanford Graduate School of Business and Pamela Haunschild, a professor at the McCombs School of Business at the University of Texas at Austin, the research will be honored with the annual West Publishing Best Paper Award of the Organization and Management Theory division of the Academy of Management at its annual meeting in Seattle August 4. A version of the paper, titled "The Liability of Good Reputation: A Study of Product Recalls in the U.S. Automobile Industry," will be published in the 2003 AOM (Academy of Management) Best Paper Proceedings.
While other research has demonstrated the financial value of good reputations to companies, Rhee and Haunschild used data on automobile product recalls in the United States from 1975 to 1999 to show that a good reputation also could be an organizational liability. They found that immediately following a recall, market share dropped more for the auto manufacturers with the best reputations for quality. The liability of a good reputation was transformed again into an asset, however, because high reputation firms were better at reducing their subsequent mistakes, perhaps because they had more incentive to learn from them.