Market Overreaction to Product Recall Revisited--The Case of Firestone Tires and the Ford Explorer

Suresh Govindaraj (), Bikki Jaggi and Beixin Lin

Review of Quantitative Finance and Accounting, 2004, vol. 23, issue 1, 54 pages

Abstract: We revisit the issue of market reaction to product recall and evaluate the magnitude of market reaction to the news of recall. We also examine how the competitors' stock prices are affected by the product recall. Specifically, we evaluate the stock price effects of events relating to the recall of Firestone tires by the Bridgestone Corporation, which were linked to the rollover accidents of the Ford Explorer SUVs. Our results indicate that the initial loss in the market value both for the Bridgestone Corporation and Ford Motor Company was far in excess of direct costs associated with recall. The market losses are approximately equal to the near worst-case estimates of direct and indirect costs, litigation costs, regulation compliance costs and costs associated with future losses in sales. The firms recovered their market value as more information on actual costs became available. These results suggest that the market initially overreacts negatively to the recall news and this reaction is generally based on all potential losses associated with recall. This reaction is corrected as information on actual costs becomes available. With regard to the competitors, our results show that the major competitors in the tire and auto industries experienced a significant gain in the market value of their stocks probably because their products were substitutes for the products affected by recall.

Date: 2004
References: Add references at CitEc
Citations: View citations in EconPapers (32)

Downloads: (external link)
http://journals.kluweronline.com/issn/0924-865X/contents (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:23:y:2004:i:1:p:31-54

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().