Yahoo Finance Automakers Delay Recalls to Minimize Negative Attention: Study
Automakers tend to delay announcing recalls until they can "hide in the herd" of other recalls, lessening the attention paid to their recall and the negative impact on their stock price, a recent study suggests.
The study found that 73 percent of recalls are announced in clusters, suggesting that there is a pattern to recall announcements, rather than recalls being randomly called.
The study authors recommended that the National Highway Traffic Safety Administration (NHTSA) require automakers to promptly disclose the date they first became aware of a problem and make that publicly searchable.
Rather than announce recalls as soon as they surface, automakers wait until they can blend into a crowd of other recalls, an academic study suggests. This "clustering" of recalls reduces the attention paid to a given recall, and that lessens the negative impact on the stock price, because the automaker that initiates a cluster of recalls is the one that gets the most attention.
The study, "Hiding in the Herd: The Product Recall Clustering Phenomenon," examined 3117 automotive recalls over 48 years from 1966 to 2013, finding that 73 percent of recalls were announced in clusters. The recall clusters lasted for 34 days on average, and during those periods, an average of 7.6 recalls were announced. The "leading" automaker that prompted a cluster experienced a 67 percent larger penalty in stock price than other automakers that announced recalls shortly thereafter, according to the study.
"I think that this study has raised awareness of something that previously was not recognized both in academia as well as in industry, that there [is] this temporal clustering of recalls," said Jason Miller, an associate professor of supply chain management at Michigan State University and an author of the paper. "The general public doesn’t realize that it is often not clear cut on whether [automakers] should have announced a recall or not."
The study examined the six automakers with stock publicly traded in the United States: Chrysler, Ford, General Motors, Honda, Nissan, and Toyota. Of those automakers, only up to 9 percent of their recalls were leading recalls. Toyota was the exception, with recalls that were much more random. Leading recalls made up 31 percent of Toyota's total recalls, which, Miller said, suggests that Toyota may have acted as a trigger for other automakers, given the Japanese automaker’s reputation as a leader in quality. "Unfortunately, we cannot observe what's going on in the decision makers' heads. We only have the archival data," Miller said. "But that mechanism would make sense."
The researchers ascribed the penalty for the leading recaller to attribution theory, which in this context says that the more unique a recall appears relative to competitors, "the greater the market attribution of blame to the firm and the larger the stock market penalty." Uniqueness comes from being the first to announce a recall in a cluster, or being the leading recall.
The recalls which follow, or the recalls in the cluster, appear to be less unique since they can blend into the crowd. If there is a larger period between clusters, the leading recaller is penalized further since its perceived uniqueness increases. Given the differing stock market penalties for leading or following recalls, the research suggests that the markets judge a recall more on its timing than the actual severity of the recall.
The researchers recommended that the National Highway Traffic Safety Administration (NHTSA) require automakers to promptly disclose the date when they became aware of a problem to discourage automakers from holding on to recalls until they can be released in a cluster. This is how the Food and Drug Administration (FDA) handles recalls.
NHTSA, when asked for comment, said, "The National Highway Traffic Safety Administration reviews all recall reports for possible concerns, including timeliness concerns, and follows up with the manufacturer for additional information, where needed."
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