Perception Is Everything - A Study On Product Recalls And Corporate Political Strategies

When do product recalls negatively affect firms’ sales? Can corporate political strategies mitigate this potential negative relationship? Based on adaptation-level theory we argue that abnormal product recalls, defined as recalls that contrast with customers’ prior expected levels, damage firms’ sales. Furthermore, we argue that while firms’ use of corporate political strategies (i.e. lobbying) helps them realize market objectives, in the event of abnormal recalls these political strategies backfire. Hypotheses are tested in the context of vehicle safety recalls in the United States auto industry during the period 1998 to 2011, and the data provides support to our theory. We contribute to the literature on product recalls by offering a more fine-grained analysis as to when recalls matter for firm performance, and highlighting the contingent effect of corporate political strategies in this relationship.