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Learning About Product Quality: Automotive Recalls and Country Reputations

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Document pages: 38 pages

Abstract: Prior studies have argued that quality uncertainty for experience goods may be in part resolved by firm-specific reputational assets. This paper demonstrates that unobserved quality may also be signaled by a reputational asset common to many firms – country of origin. Analyzing stock market reactions to all published automotive recalls in the U.S. from 1966-2011, I find evidence that consumers learn about product quality both through historic experience with firms and country of origin. I estimate that firms whose products are recalled initially experience abnormal returns of −0.6 , and that these abnormal returns diminish with each subsequent recall. Further, I find significant intra-country spillovers of −0.15 during recall announcements. These results have implications for firms’ willingness to invest in quality and may lend insight into the perceived country-specific quality observed in the automotive industry.

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