Me First? Behavioral Agency and CEO Opportunism in Faulty Product Recalls

Abstract

Stock options have been widely used to align the interests of executives and shareholders. By integrating theories of attention with the behavioral agency model, we offer a framework that predicts opportunistic CEO responses to option incentives that affect firm customers. We argue that CEOs will preserve their option wealth through their timing of product recalls. Specifically, during a fiscal year, CEOs announce product recalls during periods of market inattention to reduce loss or, during high attention fiscal year-end period, may postpone product recalls to delay loss. Such delays and evasions can harm customers both financially and physically. Using a sample from U.S. public medical device producers that made product recalls during 2004–2017, we confirm our hypotheses. Our findings give boards of medical device firms behavioral levers to protect users and the firm’s future.