Source: Rita Jane Gabbett, MEATINGPLACE, 3/16/15


Researchers at Utah State University have calculated the cost of recalls to publicly traded companies by looking at stock price reactions when meat, poultry and processed egg recalls occur. Some of the findings were predictable; others were not.

Predictably, stock prices reacted more negatively to recalls that pose the most human health threat, those USDA’s Food Safety and Inspection Service classifies as “Class I”. Stock prices also declined more when larger volumes of product were recalled and relative to the amount of media coverage of the event.

The researchers also found that stock prices reacted less dramatically when a firm incurred more than one recall within the past year.

“Contrary to logic that firms incurring more than one recall within the past year might reflect more negative impact in stock prices as it could reflect sustained damage to reputation, the effect of this factor is actually positive,” the researchers wrote. Although stock prices still decline, recurrent firms have on average about a 1.29 percent stronger stock price five days after a recall relative to a firm facing its first recall in the past year, holding everything else constant.

“Apparently, investors take into consideration the past performance of a company when dealing with product recalls as they adjust firm valuations. When a firm efficiently follows the protocols for managing a recall event and establishes clear communication channels with stakeholders, it sends a good signal to the stock market, and investors appear to be more comfortable that another recall is not as major of a threat as is the first recall in recent history,” the researchers concluded.

“Additionally, a firm’s past experience managing recalls can influence the outcome from contamination incidents on the market value of the firms. That is, firms undertaking an effective food safety crisis management strategy may help minimize stock market reactions.”

Based on recall data from 1994 through 2013, the stock price reaction to a recall is negative, but not right away. It takes four days after a recall event for stock prices to react in a statistically significant way. Five days after a Class I recall, stock returns decreased on average by 1.15 percent. Class II and Class III recalls did not show a statistically significant stock price impact.
The extent of media information accompanying a recall also has an impact. For example, one additional recall-related article published within five days after the recall announcement decreased stock returns on average by 0.10 percent.

The research was presented by Veronica Pozo and Ted Schroeder in a paper titled “Costs of Meat and Poultry Recalls to Food Firms.”

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