Review of Quantitative Finance and Accounting, 23: 31–54, 2004
2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
Market Overreaction to Product Recall Revisited—The
Case of Firestone Tires and the Ford Explorer
Rutgers Business School—Newark and New Brunswick, Rutgers University, Department of Accounting and Info.
Systems, 302B Ackerson Hall, University Heights, 180 University Avenue, Newark, NJ 07102, USA. Tel.: (973)
353-1017, Fax: (973) 353-1283
School of Business, Montclair State University
Abstract. We revisit the issue of market reaction to product recall and evaluate the magnitude of market reaction
to the news of recall. We also examine how the competitors’ stock prices are affected by the product recall.
Speciﬁcally, we evaluate the stock price effects of events relating to the recall of Firestone tires by the Bridgestone
Corporation, which were linked to the rollover accidents of the Ford Explorer SUVs. Our results indicate that the
initial loss in the market value both for the Bridgestone Corporation and Ford Motor Company was far in excess
of direct costs associated with recall. The market losses are approximately equal to the near worst-case estimates
of direct and indirect costs, litigation costs, regulation compliance costs and costs associated with future losses
in sales. The ﬁrms recovered their market value as more information on actual costs became available. These
results suggest that the market initially overreacts negatively to the recall news and this reaction is generally based
on all potential losses associated with recall. This reaction is corrected as information on actual costs becomes
available. With regard to the competitors, our results show that the major competitors in the tire and auto industries
experienced a signiﬁcant gain in the market value of their stocks probably because their products were substitutes
for the products affected by recall.
Keywords: event study, Ford Explorer, Firestone tires, product recall, market reaction, cumulative abnormal
JEL Classiﬁcation: G14, K13, L15, L62
Several existing studies show that there is a considerable drop in the market value of ﬁrms
that announce product recalls, and that this drop is generally in excess of any tangible
and direct costs associated with the recalls (for example, see Jarrell and Peltzman, 1985;
Dowdell, Govindaraj and Jain, 1992). Though these studies offer numerous explanations
for potential costs associated with recalls, they do not systematically estimate the costs
associated with recalls, and do not empirically test whether the excessive stock price drop
is directly associated with potential recall costs. In a recent work, Prince and Rubin (2002)
evaluate the magnitude of the negative market reaction to private product liability litigation