In this paper, we attempt to analyze how the recall types (Voluntary Recall
vs. Mandatory Recall) chosen by firms affect the firms’ values in regards to
the implementation of the recall as an important business strategy, and how
the characteristics of firms and(or) defective products affect the firms’ choices
between the voluntary and mandatory recall. Based on the results, we derive
managerial and policy implications. The data on the stock prices of 38
recall-related firms with 101 defective products reported between 2000 and
2010 are used. For empirical analysis, event study analysis and binary logit
model are employed.
Estimation results show that the voluntary recall has less negative influence
on the abnormal return than the mandatory recall. Also, the higher the hazard
level, price, and the number of defective products sold, the higher the
probability of a firm choosing the voluntary recall becomes, and the defective
products with the brand name of the firm are more likely to be recalled
voluntarily. This paper is significant in that it is the first study to our
knowledge that empirically analyzes Korean firms’ choices of recall types and
their effects on the firms’ values.