CEO Stock Ownership, Recall Timing, and Stock Market Penalties

Abstract

Problem definition: Firms often delay the decision to recall faulty medical devices long after they become aware of a defect, thereby putting public safety at heightened risk. However, the factors contributing to these delays are not well-understood. To help address this gap, we examine whether and how CEO stock ownership influences the speed with which faulty medical devices are recalled and whether this influence varies with recall severity. We then examine whether the stock market penalizes firms differently based on recall decision-making speed and whether this penalty also varies with recall severity. Methodology/results: We collect data on 2,144 medical device recalls across 50 public medical device firms from 2002 to 2015. We use accelerated failure time models to test the effects of CEO stock ownership on the time-to-recall and event study methodology to examine how the time-to-recall influences stock market returns. Supplementary analyses shed further light on underlying mechanisms. Robustness checks demonstrate consistent results, including coarsened exact matching, reverse causality tests, Cox proportional hazard models, generalized linear regression models, and a mediation analysis. Firms whose CEOs possess greater ownership stakes recall medical devices more slowly, and this recall-slowing effect is accentuated for high-severity recalls. Delaying recalls magnifies the stock market penalty attributable to the recall, particularly for high-severity recalls. Managerial implications: Our study highlights an ownership characteristic of firms that are more likely to delay recalling faulty medical devices. Boards of directors can use insights from our study as they oversee product-quality decisions and determine the level and form of CEO compensation, and the FDA can use our findings to identify firms that might warrant extra scrutiny and better allocate its limited monitoring resources. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2021.0175 .