A Multi-Industry Assessment of the Influence of Dedicated and Transient Institutional Investors on Firms’ Product Recall Strategies and Actions

Abstract

Product recalls represent a major concern for organizations and their stakeholders because of costly financial, reputational, and legal damages that ensue from well publicized consumer safety crises. Organizations attempt to mitigate the adverse impact arising from product recalls by leveraging effective strategic recall processes. Of the recall processes available to companies, empirical evidence suggests firms’ (a) product recall strategies and (b) post-recall actions represent important elements of successful product recall remediation efforts. While supply chain researchers have considered operational antecedents, academicians have largely ignored the influence of governance structures on firms’ product recall strategies and post-recall actions. To illuminate the more nuanced effects offered by corporate governance structures, I draw on the theoretical tenets of agency theory. Specifically, I examine “agency problem II” by assessing the extent to which corporate governance structures impact firm outcomes through institutional investors’ divergent dedicated and transient interests. As such, the following research question guided my dissertation: “How does the ownership structure of a firm influence the product recall strategy and post-recall actions a manager will implement?” My second research question concerned the moderating effect of chief executive officer (CEO) power on the relationship between ownership structure and firms’ strategic recall processes. I collected data on a multi-industry sample of product recalls from publicly held organizations from 2006 through 2013 to address my research questions and test my associated hypotheses. My sample includes a diverse set of product recall announcements from three governmental agencies: Consumer Product Safety Commission, Food and Drug Administration, and Food Safety and Inspection Service. Although I found significant relationships, the results of my dissertation were largely unanticipated. Despite my unanticipated results, my dissertation sought to contribute to the corporate governance and product recall literatures by demonstrating that high levels of transient institutional ownership were positively correlated with reactive product recall strategies. Further, I sought to add value to the CEO power literature by identifying CEO tenure and CEO ownership as potential moderating influences on the firm ownership−product recall strategy relationship. I discuss my dissertation’s theoretical and practical implications while highlighting my study’s limitations and potential directions for future research for corporate governance and product recall scholars.