Examining the effect of a firm's product recall on financial values of its competitors

This study investigates the impact of product recalls on the financial performance of competitors of recalling firms. By applying the event study methodology to a broad range of consumer product recalls across various industries, we assess how recalls influence competitors' short-term abnormal returns in the stock market. We find that product recalls have a negative spillover effect on competitors' short-term stock returns. In addition, the study reveals the role of two key recall characteristics: the severity of product hazards and the type of recall strategy (proactive vs. passive), in influencing the effect of product recalls on competitors' stock returns. Specifically, competitors benefit more when product hazards are severe or when recalling firms employ a passive recall strategy. This research contributes to the literature by offering a deep understanding of the competitive effects of product recalls