The Real Cost of Product Recalls to the Toy Industry and the Spill Over Effect

What was the financial impact of the toy recalls of 2007 and what were the implications for the industry? A scholarly paper by researchers at the Universities of Maryland and Toronto may have the answer. According to the authors of the study, not only did toy companies producing recalled toys experience sharp declines in business, the rest of  toy industry did as well.   In addition, share prices of toy industry stocks declined as a result of the recalls as well. In other words, the impact of the recalls by a few companies may have had implications for the entire industry that were perhaps broader than we suspected.

The paper, entitled "Product Recalls, Imperfect Information, and Spillover Effects: Lessons from the Consumer Response to the 2007 Toy Recalls," was released in July.  I purchased the study and am working my way through it (it’s 75 pages).  In the mean time, I wanted to share what the authors say they found.

Here is the synopsis, provided by the authors, that is found at the beginning of the article:

In 2007, the Consumer Product Safety Commission (CPSC) issued 276 recalls of toys and other children’s products, a sizeable increase from previous years. The overwhelming majority of the 2007 toy recalls were due to high levels of lead content and almost all of these toys were manufactured in China. This period of recalls was characterized by substantial media attention to the issue of consumer product safety and eventually led to the passage of the Consumer Product Safety Improvement Act of 2008. This paper examines consumer demand for toys following this wave of dangerous toy recalls. The data reveal four key findings. First, the types of toys that were involved in recalls in 2007 experienced above average losses in Christmas season sales. Second, Christmas sales of infant/preschool toys produced by manufacturers who did not experience any recalls were about 25 percent lower in 2007 as compared to earlier years, suggesting industry-wide spillovers. Third, a manufacturer’s recall of one type of toy did not lead to a disproportionate loss in sales of their other types of toys. And, finally, recalls of toys that are part of a brand had either positive or negative effects on the demand for other toys in the property, depending on the nature of the toys involved. Our examination of the stock market performance of toy firms over this period also reveals industry wide spillovers. The finding of sizable spillover effects of product recalls to non-recalled products and non-recalled manufacturers has important implications for regulation policy.

Seth M. Freedman

Melissa Schettini Kearney

Mara Lederman

Working Paper 15183

http://www.nber.org/papers/w15183

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue

Cambridge, MA 02138

July 2009