Automakers found to delay vehicle recalls to minimise stock value loss
Researchers have found that automotive firms typically time product recalls to minimise stock price penalties which results in unnecessary delays and clusters of subsequent recalls by other companies.
A team from the University of Notre Dame analysed 3,117 auto recalls over a 48-year period (1966-2013) using a model to investigate recall clustering.
According to the study, automobile recalls are often announced “after inexplicable delays”. They cited Toyota’s unintended acceleration recall and General Motors’ ignition switch recall as two noteworthy examples, which were associated with 37 and 124 deaths respectively.
In both cases, consumers’ lives were put at risk while firms hesitated to announce a recall, even after they were aware of the serious product defects.
“We show that 73 per cent of announced recalls within those 48 years occurred in clusters,” said Kaitlin Wowak, assistant professor of IT, analytics, and operations at Notre Dame's Mendoza College of Business. “On average, a recall cluster forms after a 16-day gap in which no recalls are announced. Clusters persist for 34 days and consist of 7.6 following recalls.”
In 2017, Ford announced a recall due to leaky fuel tank valves, which was quickly followed by a fuel tank recall from Honda and an oil hose recall from Chrysler.
The team suggests that recall announcements may not be triggered solely by individual firms’ product quality defect awareness, but may also be influenced by competitor recalls.
The team also found significant stock penalties associated with being the first to recall.
“Leading recalls are associated with as high as a 67 per cent larger stock market penalty than following recalls,” Wowak said.
“The market penalty for a following recall shortly after the leading recall is less than the market penalty for a following recall towards the end of the cluster.
“The stock market penalty faced by a leading recall grows as the time since the end of the last cluster increases. That is, as the time between the last following recall of one cluster and the leading recall of the subsequent cluster increases, so too does the market penalty for the leading recall of the subsequent cluster.”
The study compared two US agencies, the National Highway Traffic Safety Administration (NHTSA) and the Food and Drug Administration (FDA), and how quickly they acted to instigate recalls.
“The NHTSA does not require firms to provide defect awareness dates,” Wowak said.
“However, requiring auto firms to report the date that they first became aware of a defect may discourage them from hiding in the herd and prompt them to make more timely and transparent recall decisions, reducing the prevalence of clustering, which creates unnecessary delays in removing harmful products from the market.”
One of the largest recalls in modern history was created by Volkswagen and its attempts to hide its vehicles’ emissions from regulators.
German prosecutors ultimately charged the firm’s leadership with market manipulation in 2019.
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