This is a strange title, isn’t it? And the link with the accompanying photograph is even stranger.
Here’s the story. You have heard that Ferrari has recalled the 1200+ exemplars of its latest car, the 458 Italia. But have you an idea what the impact of this recall would be on the share price (assuming that Ferrari would have its own outstanding shares).
The answer to this question is given in a recent study. In an article entitled « Does a Firm’s Product-Recall Strategy Affect Its Financial Value? » three researchers of the University of Arizona revealed that the share price will be more negatively impacted by pro-active recalls than by passive ones.
It may sound strange but the authors explain that shareholders view pro-active behaviours as clues for the seriousness of the problem:
« Although a proactive strategy may have the potential benefits of maintaining consumer confidence and instilling brand loyalty, investors tend to be more concerned about the firm’s ability to maintain a healthy cash flow in the short run and how the recall event may negatively affect product sales. By observing that the firm is moving quickly and early to initiate the recall and is proactively managing it, investors may speculate that the financial consequences are going to be severe and that the firm had no other choice but to act proactively to reduce the potential impact. In other words, the investors are likely to interpret proactive actions as a signal of severe financial loss, which typically includes expenses related to the recall process, potential litigation, liability, and penalty payment for damages to consumers or properties ».
On the consumer side the picture looks very different of course. Consumers are more likely to trust proactive than passive companies. This study stresses the gap existing between concepts like Customer Equity and Shareholder Equity and confirms that the two can not be managed simultaneouslyTags: automotive, stock market