Recall and Response: Relationship Adjustments to Adverse Information Shocks

Abstract

How resilient are buyer-supplier relationships to new information about product defects? We construct a novel dataset of U.S. consumer product recalls sourced from foreign suppliers between 1995 and 2013. Using an event-study approach, we find that, compared to control relationships, buyers that experience recalls temporarily reduce their probability of trading with the suppliers of the recalled products by 25%. A milder decrease persists, accompanied by increased reliance on other foreign suppliers. Buyers that are affiliated with their suppliers decrease trade several quarters earlier than unaffiliated buyers, consistent with decision-making and information flowing faster within than across firm boundaries.