|M.Sc Student||Kohavi Yitzhak|
|Subject||Stock Market Reaction to US Automotive Recalls|
|Department||Department of Industrial Engineering and Management||Supervisors||Dr. Benjamin Bental|
|Professor Kim Moshe|
In the U.S., once a car manufacturer knows that a vehicle does not stand up to standards, he has to provide this information to car owners, to a government agency that deals with such problems and fix the problem. Such an event is known as a "recall". The present research employs recall data pertaining to the six largest car manufacturers operating in the U.S. market during a period of two decades, in order to shed light on the effect of recalls and their characteristics on the reaction of the capital-market. Moreover, this research investigates how the effects of recalls differ among the various manufacturers. Results show that new information regarding product quality (implicit in a recall), has a stronger effect on manufacturers which are perceived to be more reputable. However, it is also documented that manufacturers accumulating reputation for low quality regarding important vehicle characteristics, can expect severe negative market reaction when a recall is publicized. In addition, it is shown that new information is juxtaposed against previous assessments which were capitalized in capital market: the higher the surprise embodied in the new information, and the further it negates previous assessments, the stronger is the market reaction. Moreover, recalls induce a stronger market reaction when they are due to a more significant factor, such as increased risks of fire and accidents, as well as when they relate to vehicles of a very recent vintage. A larger market reaction is induced when the recall is initiated by the manufacturer, and when the volume of vehicles involved is large.