Car makers delay auto recalls to ‘hide in the herd’

New research finds that car makers frequently wait to make announcements of automotive recalls until after a competitor issues a recall—even when it’s unrelated to similar defects.

This suggests that recall announcements may not be triggered solely by individual firms’ product quality defect awareness or concern for the public interest, but also by competitor recalls, a phenomenon that no prior research had investigated.

For the study, published in Manufacturing and Service Operations Management, researchers analyzed 3,117 auto recalls over 48 years from 1966 to 2013 using a model to investigate recall clustering and categorized recalls as leading or following within a cluster. They found that 73% of recalls occurred in clusters that lasted 34 days and had 7.6 following recalls on average.

On average, a cluster formed after a 16-day gap with no announced recalls. They found 266 such clusters over the period studied.

“The implication is that auto firms are either consciously or unconsciously delaying recall announcements until they are able to hide in the herd,” says coauthor George Ball, assistant professor of operations and decision technologies at Indiana University’s Kelley School of Business. “By doing this, they experience a significantly reduced stock penalty from their recall.”

Researchers found as much as a 67% stock market penalty difference between leading recalls, which initiate the cluster, and following recalls, who follow recalls and hide in the herd to experience a lower stock penalty.

This indicates a “meaningful financial incentive for auto firms to cluster following recalls behind a leading recall announcement,” researchers say. “This stock market penalty difference dissipates over time within a cluster. Additionally, across clusters, the stock market penalty faced by the leading recall amplifies as the time since the last cluster increases.”

The authors also found that firms with the highest quality reputation, in particular Toyota, triggered the most recall followers.

“Even though Toyota announces some of the fewest recalls, when they do announce a recall, 31% of their recalls trigger a cluster and leads to many other following recalls,” Ball says. “This number is between 5 and 9% for all other firms. This means that firms are likely to hide in the herd when the leading recall is announced by a firm with a stellar quality reputation such as Toyota.

“A key recommendation of the study is for the National Highway Traffic Safety Administration (NHTSA) to require auto firms to report the specific defect awareness date for each recall, and to make this defect awareness date a searchable and publicly available data field in the auto recall dataset NHTSA provides online,” Ball says.

“This defect awareness date is required and made available by other federal regulators that oversee recalls in the US, such as the Food and Drug Administration. Making this defect awareness date a transparent, searchable, and publicly available data field may discourage firms from hiding in the herd and prompt them to make more timely and transparent recall decisions.”

Additional coauthors are from the University of Illinois, the University of Notre Dame, the University of Minnesota, and Michigan State University.

Source: Indiana University

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