Vertical Spillover of Product Recalls: Theorization and Empirical Examination in the US Automobile Industry

Abstract

This study examines the vertical spillover effect of product recalls, defined as the losses supplier firms incur when buyer firms announce product recalls. Drawing on social network theory, this study theorizes that relationship ties between recalling firms and their suppliers serve as “pipes” and “prisms” that transmit a cash flow effect and impression effect, respectively, of product recalls from the recalling firms to their suppliers. In addition, such vertical spillover effects are shaped by the extended social network consisting of institutional intermediaries—common business ties, common institutional ownership, and common analyst coverage between suppliers and recalling firms. Hypothe..