Market overreaction to product recall revisited - The case of firestone tires and the ford explorer

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.