The effect on stockholder wealth of product recalls and government action: The case of Toyota's accelerator pedal recall

• Minor recalls prior to the January 2010 recalls had no effect on the cumulative abnormal returns.
• Major recall in January of 2010 caused the company's cumulative abnormal returns to fall by 19%.
• Investigation by the regulatory agency found that Toyota had solved the problem.
• This caused Toyota's cumulative abnormal returns to rise by almost 9%.

We analyze the effect of Toyota's faulty accelerator pedal on stockholder wealth. Using the event study methodology, we show that a major recall in January of 2010 is associated with a 19% fall in the company's cumulative abnormal returns. Continued concerns that Toyota was unable to identify and adequately fix the problem prompted the National Highway Traffic Safety Administration to conduct its own investigation in March, 2010. The results of this government investigation exonerated the company and Toyota's cumulative abnormal returns rose by almost 9%. The Toyota case provides an opportunity to study a product recall with both company error and a government action that addressed concerns about the safety of the product.