Product recalls provoke a sharp increase in negative chatter on social media sites. This bad buzz can cause a drop in sales and the market cap—or total market value of unpurchased shares—of the recalling company.
But the damage doesn’t end there. A study of the automotive industry shows that innocent firms often face a similar fate when they get caught in a “perverse halo” of negativity created by a domestic competitor’s recall.
“Bad news travels fast on social media,” says Abhishek Borah, an assistant professor of marketing at the University of Washington’s Foster School of Business. “Our study demonstrates that a recall event increases negative chatter that can have damaging effects on the sales and stock market performance of rivals.”
During crisis situations, it is imperative for firms to communicate with consumers in the right way.
