The role of social media and brand equity during a product recall crisis: a shareholder value perspective
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Product recalls: companies fear them, customers hate them, and investors pay close attention to them. The goals of this dissertation are to examine whether and to what extent social media can hurt or help a company's shareholder value in the event of a product recall crisis and to provide insights into the role of brand equity as a potential moderator of the firm value impact. This study identifies and operationalizes four metrics of online WOM that may moderate the negative product recall effects: volume, valence, spread rate, and breadth. In addition, this study explores whether a company's engagement in online chatter potentially mitigates the negative effects of the social media. Finally, this study assesses whether social media effects are homogeneous across brands. Research to date has not yet considered whether the effects of social media are different for big versus small brands when assessing the negative impact of crisis events on firm value. The author utilizes an event study methodology from a sample of 186 product recall announcements reported in USASearch's product recall data. Online WOM data is collected from a social media company and firm value data is obtained from CRSP, COMPUSTAT, and 1/B/E/S. The findings suggest that product recalls result in significantly negative abnormal returns for firms. Furthermore, negative online WOM exacerbates the negative effects of product recall crises on firm value. The faster spread of online WOM also negatively affects firm value during product recalls. More importantly, such negative effects of the valence of online WOM on firm value are lower for big brands than small brands, indicating an insurance-like protection of shareholder value from big brands. In contrast, small brands benefit from the larger volume of online WOM, possibly due to overall brand awareness building. This dissertation contributes by highlighting the threats and opportunities presented by the new social media environment and the role of brand during a product recall crisis. This study provides practical implications for crisis management as well as theoretical insights for scholars in the field of product recall management and marketing communications.
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