Product Recall Contagion in the Supply Chain

Following a manufacturer's large product recall, its supplier's shareholders may perceive uncertain future demand for the supplier's products and react punitively, causing a drop in the supplier's stock return—that is, a contagion (or negative spillover). Moreover, shareholders’ information asymmetry may cause them to “screen” the supplier's information cues to determine the supplier's extent of demand uncertainty. The ideal screen is the supplier's proportion of sales revenue from the recalling manufacturer. However, not all suppliers disclose this information. Therefore, we propose that shareholders use a two-stage screening. The first screen is whether the supplier demonstrates transparency by voluntarily disclosing information about its customer portfolio. The second screen—available only to the subset of suppliers that disclose customer information—is the supplier's sales revenue from the recalling manufacturer. We used a sample of 896 U.S. public manufacturer–supplier dyads impacted by 27 large manufacturer recalls. An event study followed by cross-sectional regressions provides evidence of contagion. In addition, it reveals that the supplier's voluntary disclosure of customer information mitigates contagion, whereas revenue dependence aggravates it. Contextual (i.e., recall) variables also impact contagion. Our research study contributes to the supply-chain contagion literature, screening theory, and customer information disclosure literature. The findings inform supplier firm managers that their prior customer-related disclosures and the contextual variables can moderate contagion.