The Impact of Interorganizational Strategic Activities on Product Recall Risk

Abstract

Product recalls can pose major financial and reputational risks for firms. However, there is limited empirical research about the antecedents of these harmful events. This study investigates the impact of mergers and acquisitions and joint ventures on product recalls. Furthermore, we introduce the strategic flexibility of the firm’s industry rivals as a moderator, influencing these relationships. We draw on the punctuated equilibrium theory and a large longitudinal dataset from the U.S. Food and Drug Administration. Our results indicate that mergers and acquisition activity has an inverted U-shaped relationship and that joint venture activity has a U-shaped relationship with product recalls. Additionally, we show that the latter relationship is flatter when the strategic flexibility of rivals is higher. Our findings contribute to theory in several ways: First, we advance punctuated equilibrium theory by identifying why firms can change from the equilibrium period to the revolutionary period and, more importantly, what negative outcomes can emerge in this period. Second, we advance mergers and acquisition and joint venture literature by demonstrating that inorganic growth can be related to increased product recalls, especially if the firm has a moderate level of mergers and acquisition activity, as opposed to either a low or a high level of it. Third, the findings contribute to product recall literature by giving another explanation for the increase of product recalls for firms. Practical implications are discussed.