Vertical Spillover of Product Recalls: Theorization and Empirical Examination in the US Automobile Industry

ABSTRACT This study examines the vertical spillover effect of product recalls, defined as the losses supplier firms incur when buyer firms announce product recalls. Drawing on social network theory, this study theorizes that relationship ties between recalling firms and their suppliers serve as “pipes” and “prisms” that transmit a cash flow effect and impression effect, respectively, of product recalls from the recalling firms to their suppliers. In addition, such vertical spillover effects are shaped by the extended social network consisting of institutional intermediaries—common business ties, common institutional ownership, and common analyst coverage between suppliers and recalling firms. Hypotheses are tested using a comprehensive dataset collected from seven sources, comprising 154 media‐reported major automobile recalls in the United States from 2010 to 2019, involving 752 buyer–supplier dyads. Confirming the vertical spillover effect, the findings indicate that a buyer's automobile recalls result in a significant loss of firm value for its suppliers. This effect is stronger when the supplier shares more common business ties with the recalling automakers but weaker when there is a high level of common institutional ownership and common analyst coverage. The findings extend understanding of the supply chain effects of product recalls and their contingencies.