Walking the Walk: Corporate Social Responsibility and Product Recalls in the Automotive Industry
DOI:
https://doi.org/10.47941/ijf.1733Keywords:
Corporate Social Responsibility, Product Recalls, Automotive Industry, Voluntary Recalls.Abstract
Purpose: The purpose of this paper is to disentangle a unique way in which corporate social responsibility (CSR) affects firm value in the context of product recalls in the automotive industry.
Methodology: Using a sample of product recall events in the automotive industry between 2002 and 2018 and controlling for the spread of product recalls across product lines, this study explores the underlying economic channels through which CSR improves investments in quality. For robustness check, self-selection bias is corrected for using a 2SLS approach and alternative measures for product failures and CSR.
Findings: The authors find that firms with higher CSR scores are associated with a lower frequency of recalls. Moreover, higher CSR scores are associated with a higher likelihood of voluntary recalls, higher product quality, higher capital expenditures, and higher employee productivity.
Unique Contribution to Theory, Practice, and Policy: This study offers insights to managers, investors, and board members, showing the potential benefits of engaging in CSR activities. This study contributes to the literature on the effect of CSR on different managerial decisions and the factors that affect product recalls. Additionally, the study reveals the connection between CSR and product recalls.
Downloads
References
Aragon, A., Huber, U., Möller, T., & Nick, H. (2019). Return to sender: resolving the automotive- recall resurgence. Mckinsey & Company, 13.
Bardos, K. S., Ertugrul, M., & Gao, L. S. (2020). Corporate social responsibility, product market perception, and firm value. Journal of Corporate Finance, 62, 101588.
Barnea, A., & Rubin, A. (2010). Corporate social responsibility as a conflict between shareholders. Journal of business ethics, 97(1), 71-86.
Bénabou, R., & Tirole, J. (2010). Individual and corporate social responsibility. Economica, 77(305),1-19
Borghesi, R., Houston, J. F., & Naranjo, A. (2014). Corporate socially responsible investments: CEO altruism, reputation, and shareholder interests. Journal of Corporate Finance, 26, 164-181.
Chen, Y., Ganesan, S., & Liu, Y. (2009). Does a firm's product-recall strategy affect its financial value? An examination of strategic alternatives during product-harm crises. Journal of Marketing, 73(6), 214-226.
Cheung, A. (2016). Corporate social responsibility and corporate cash holdings. Journal of Corporate Finance.
Cheung, A., Hu, M., Schwiebert, J., 2015. Corporate social responsibility and dividend policy. Working paper. School of Economics and Finance, Curtin University, Australia.
D'Amato, A., & Falivena, C. (2020). Corporate social responsibility and firm value: Do firm size and age matter? Empirical evidence from European listed companies. Corporate Social Responsibility and Environmental Management, 27(2), 909-924.
Deng, X., Kang, J. K., & Low, B. S. (2013). Corporate social responsibility and stakeholder value maximization: Evidence from mergers. Journal of financial Economics, 110(1), 87-109.
Di Giuli, A., & Kostovetsky, L. (2014). Are red or blue companies more likely to go green? Politics and corporate social responsibility. Journal of Financial Economics, 111(1), 158-180.
Dunbar, C. G., Li, Z. F., & Shi, Y. (2020). Corporate social responsibility and CEO risk-taking incentives. Journal of Corporate Finance, 64(101714)
Edmans, A. (2011). Does the stock market fully value intangibles? Employee satisfaction and equity prices. Journal of Financial economics, 101(3), 621-640.
El Ghoul, S., Guedhami, O., Kwok, C. C., & Mishra, D. R. (2011). Does corporate social responsibility affect the cost of capital?. Journal of banking & finance, 35(9), 2388-2406.
Flammer, C. (2013). Corporate social responsibility and shareholder reaction: The environmental awareness of investors. Academy of Management Journal, 56(3), 758-781.
Friedman, M. (1970). The social responsibility of business is to increase its profits. New York Times Magazine, 13 September, 122–6.
Gao, H., Xie, J., Wang, Q., & Wilbur, K. C. (2015). Should ad spending increase or decrease before a recall announcement? The marketing–finance interface in product-harm crisis management. Journal of Marketing, 79(5), 80-99.
Gillan, S., Hartzell, J. C., Koch, A., & Starks, L. T. (2010). Firms’ environmental, social and governance (ESG) choices, performance and managerial motivation. Unpublished working paper, 10
Godfrey, P. C. (2005). The relationship between corporate philanthropy and shareholder wealth: A risk management perspective. Academy of management review, 30(4), 777-798.
Godfrey, P. C., Merrill, C. B., & Hansen, J. M. (2009). The relationship between corporate social responsibility and shareholder value: An empirical test of the risk management hypothesis. Strategic management journal, 30(4), 425-445.
Gormley, T. A., & Matsa, D. A. (2011). Growing out of trouble? Corporate responses to liability risk. The Review of Financial Studies, 24(8), 2781-2821.
Goss, A., & Roberts, G. S. (2011). The impact of corporate social responsibility on the cost of bank loans. Journal of Banking & Finance, 35(7), 1794-1810.
Guiso, L., Sapienza, P., & Zingales, L. (2015). Corporate culture, societal culture, and institutions. American Economic Review, 105(5), 336-339.
Harajoto, M.A. and J. Hoje. 2011. Corporate governance and CSR nexus. Journal of Business Ethics 100, 45–67
Hong, Y., & Andersen, M. L. (2011). The relationship between corporate social responsibility and earnings management: An exploratory study. Journal of Business Ethics, 104, 461-471.
Jian, M., & Lee, K. W. (2015). CEO compensation and corporate social responsibility. Journal of Multinational Financial Management, 29, 46-65.
Kaplan, S. N., & Zingales, L. (1997). Do investment-cash flow sensitivities provide useful measures of financing constraints?. The quarterly journal of economics, 112(1), 169-215.
Kini, O., Shenoy, J., & Subramaniam, V. (2017). Impact of financial leverage on the incidence and severity of product failures: Evidence from product recalls. The Review of Financial Studies, 30(5), 1790-1829.
Krüger, P. (2015). Corporate goodness and shareholder wealth. Journal of financial economics, 115(2), 304-329.
Lins, K. V., Servaes, H., & Tamayo, A. (2017). Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. The Journal of Finance, 72(4), 1785-1824.
Malik, M., & Jebari, F. (2023). Product recall and CEO compensation: Evidence from the automobile industry. Finance Research Letters, 54, 103815.
Masulis, R. W., & Reza, S. W. (2015). Agency problems of corporate philanthropy. The Review of Financial Studies, 28(2), 592-636.
Matsa, D. A. (2011). Competition and product quality in the supermarket industry. The Quarterly Journal of Economics, 126(3), 1539-1591.
Minor, D. (2015). The value of corporate citizenship: protection. Harvard Business School Strategy Unit Working Paper, (16-021).
Noack, D., Miller, D. R., & Smith, D. (2019). Let me make it up to you: Understanding the mitigative ability of corporate social responsibility following product recalls. Journal of Business Ethics, 157(2), 431-446.
Phillips, G. M. (1995). Increased debt and industry product markets an empirical analysis. Journal of financial Economics, 37(2), 189-238.
Phillips, G., Sertsios, G., 2013. How do firm financial conditions affect product quality and pricing? Management Science 59, 1764–1782.
Rakotomavo, M. T. (2012). Corporate investment in social responsibility versus dividends? Social Responsibility Journal.
Rayfield, B., & Unsal, O. (2019). Product recalls, lobbying, and firm value. Management Decision, 57(3), 724-740.
Servaes, H., & Tamayo, A. (2013). The impact of corporate social responsibility on firm value: The role of customer awareness. Management science, 59(5), 1045-1061
Singh, K., & Grewal, R. (2020). Lobbying and Product Recalls: A Study of the US Automobile Industry. Available at SSRN 3671859.
Steven, A. B., Dong, Y., & Corsi, T. (2014). Global sourcing and quality recalls: An empirical study of outsourcing-supplier concentration-product recalls linkages. Journal of Operations Management, 32(5), 241-253.
Taylor, P. (2011). Top 5 reasons for Class I product recall. Pharmafile.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 Dr. Fatima Jebari, Dr. Obed Izaguirre-Lozano, Dr. Sudha Krishnaswami, Dr. Matthew M. Lutey
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgment of the work’s authorship and initial publication in this journal.
