The effect of a toy industry product recall announcement on shareholder wealth

The widely publicised product recalls of lead-paint tainted toys in 2007 caused serious concerns among consumers, investors and the government. The widespread practice of global outsourcing in toy industry further intensifies consumers and investors' uncertainties about toy safety. This paper assesses the stock market reaction to recent toy recall announcements. Based upon the theoretical underpinnings from agency theory, signalling theory and prospect theory, it also develops an understanding of factors that influence the direction and magnitude of the stock market reaction. One hundred and forty-five toy recall announcements in 2000-2014 were analysed using event study and linear regression. The results show that the announcement of a toy recall was associated with a negative stock market reaction. The stock market reaction was more negative for toy product recall announcements by retailers or distributors, smaller source firms, toys with more severe hazards and source firms with higher growth potential. This paper contributes to the product harm crisis literature by extending the automotive industry-based literature to toy industries and studying their unique features. It is important that toy industry managers are aware that the stock market penalty for a product recall increases with the degree of hazard. Moreover, toy companies, retailers and distributors with high growth potential should be aware of the signal sent by following a proactive recall strategy.