Abstract
In a recent article in this Journal, Jarrell and Peltzman (1985) opened an important new area to event study research when they analyzed the effect of automobile and drug product recalls on the shareholders of firms within these industries. Earlier, Crafton, Hoffer, and Reilly (1981) and Reilly and Hoffer (1983) found that severe automobile recalls have a significant short-term impact on demand, but neither study investigated the effect of recalls on industry shareholders. In their work, Jarrell and Peltzman found that for manufacturers of automobiles and ethical drugs, capital markets penalized shareholders far more than the direct costs of the recall campaign. Further, they concluded that in both industries, shareholders of competitor firms to the firm with the recalled product(s) also suffered wealth losses. Interestingly, they concluded that over the 1975-81 period shareholders of General Motors bore greater wealth losses from the recall of a Ford or Chrysler product than they did from the recall of a GM product. This paper presents several modifications to the Jarrell-Peltzman study, as it applies to the automobile industry, for the purpose of
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