Impact of product recall announcements on retailers׳ financial value

The increase in the number of high-profile product recalls in recent years highlights the issue of ensuring product safety in global supply chains. Although the financial effect of a product recall announcement has been previously investigated from the perspective of manufacturers, it has not been investigated for retailers. Because retailers are the interface between consumers and the upstream supply chain, they play an important role as the first link in the reverse supply chain. Building upon attribution theory, signaling theory and prospect theory, we develop hypotheses about the way that investors view various attributes of a retailer׳s recall announcement and test them using event study methodology and hierarchical regression analysis of objective, archival data. The results support the hypotheses that a product recall announcement has a financial impact on retailers that is more negative for a private label product, a refund remediation strategy and for causes that are potentially more hazardous.