Automakers may delay recalls of defective products in order to minimize damage to their stock prices, putting customers in unnecessary danger, according to a new study based on 48 years of U.S. data.
Researchers found that automakers tend to issue recalls in “clusters,” meaning that a recall by General Motors makes it more likely that Ford will issue a recall shortly thereafter, for example.
The researchers also showed that the first automaker in a cluster to issue a recall experiences significantly larger damage to its stock price than firms that issue recalls shortly thereafter, incentivizing automakers that are aware of problems to sit on the information until a competitor reveals a defect.
“From the data that we have, we can’t definitely say that companies are strategically sitting on recalls,” said co-author Kaitlin Wowak, a professor of information technology, analytics and operations at the University of Notre Dame, in an interview. “It does seem that they are either consciously or subconsciously sitting on this information.”
Wowak wrote the paper, which is forthcoming in the journal Manufacturing & Operations Management, alongside Ujjal K. Mukherjee of the University of Illinois Urbana-Champaign, George P. Ball of Indiana University, Karthik V. Natarajan of the University of Minnesota and Jason W. Miller of Michigan State University.
The researchers pointed to two delayed automobile recalls connected to significant numbers of deaths: General Motors’ ignition switch recall, which was associated with 124 deaths; and Toyota’s unintended acceleration recall, which the authors said was connected to 37 deaths. Some media reports have put the Toyota death toll significantly higher.
“In both cases, consumers’ lives were put at risk while firms hesitated to announce a recall, even after they were aware of the serious product defects,” the researchers wrote.
The authors examined data from 3,117 auto recalls by six major U.S. automakers from 1966 to 2013. They utilized a model called the “Hawkes Process” to reveal clusters, finding that 73% of announced recalls occurred in such groups.
Within clusters, the firm that was first to announce a recall received a stock market penalty that was up to 67% larger than those received by companies that subsequently announced recalls, the researchers found.
Academic literature about recalls usually treats a recall as a discrete event, uninfluenced by the actions of other companies. Wowak said that concentration in the auto industry may make that approach inadequate.
“We have a few big players here,” said Wowak. “So if you think about it, it makes sense that firms could be monitoring each other’s actions in terms of recalls.”
This can create a perverse incentive structure in which companies time their recalls based on their competitors’ actions, rather than solely on consumer safety.
“As consumers, we hope to expect that every time a company becomes aware of a product issue they respond to it immediately,” said Wowak. “That’s unfortunately not the case.”
Currently, U.S. regulators do not require automakers to export the date when they became aware of the product defect that led to a recall — a requirement that exists in other areas of consumer safety such as food. And while automakers do report recall timelines on a more voluntary basis, the data they share is “fragmented” and “not structured,” according to Wowak.
The researchers said their study shows that the National Highway Traffic Safety Administration, which oversees recalls, should require automakers to keep detailed records of the events leading up to a recall, including the dates when they discovered defects.
“Requiring auto firms to report the date that they first became aware of a defect may discourage them from hiding in the herd and prompt them to make more timely and transparent recall decisions, reducing the prevalence of clustering, which creates unnecessary delays in removing harmful products from the market,” Wowak said.
In fact, Wowak said she has already heard from an employee of the National Highway Traffic Safety Administration who told her that her paper has circulated within the agency, sparking an internal debate about implementing more robust reporting requirements.
While the “recall clustering” pattern may exist in other industries beyond automobiles, Wowak said the industry was the perfect area to investigate the issue because it is well-established and rich in data.
“We focused on the automobile industry because of the concentration,” she said. “A benefit of being in the auto industry with recall data is it spans a really long time.”
“You might be able to see [recall clustering] with perhaps pharmaceutical companies,” she added.
Wowak said she came up with the idea for the paper in 2017, met with Ball, then added the other members to their team who specialized in different types of statistical modeling. In all, the process took about three years from conception to publication, Wowak said.
“I’m really happy to see it come out,” she said.
The paper, titled “Hiding in the Herd: The Product Recall Clustering Phenomenon,” was published online on Jan. 18 and is forthcoming in Manufacturing & Service Operations Management. The authors are Ujjal K. Mukherjee of the University of Illinois Urbana-Champaign, George P. Ball of Indiana University, Kaitlin Wowak of Notre Dame University, Karthik V. Natarajan of the University of Minnesota and Jason W. Miller of Michigan State University. Mukherjee is lead author.