The deterrent to dubious corporate behavior: Profitability, probability and safety recalls

AUTOMOBILE STOCK PERFORMANCE RELATED to RECALLS CONSIDERing the PRODUCTION of DEFECTIVE cars is studied for clues about the design and quality of these vehicles.

Abstract

Abstract In response to findings of abnormal stock market reactions following such dubious corporate behaviors as bribery, fraud, and the production of hazardous products, some researchers have argued that the stock market reaction is a sufficient deterrent to these behaviors so that additional regulation is not necessary. In this paper we examine stock market returns as a deterrent to dubious behavior in the production of defective automobiles. Relying on a broader range of assumptions about managerial behavior than are used in previous studies, we question the efficacy of the market as an instrument of social control.