Market Incentives for Safe Foods: An Examination of Shareholder Losses from Meat and Poultry Recalls

Abstract Meat and poultry recalls, while voluntary, are carried out under governmental oversight. If firms have financial incentives to avoid being implicated in a recall situation, governmental involvement in recalls may cause firms to internalize social costs when making investment decisions concerning food safety controls. To examine these incentives, we analyze federally supervised meat and poultry recalls from 1982 to 1998 within an event study. Results show significant shareholder losses when publicly traded food companies are implicated in a recall involving serious food safety hazards. We find no evidence that the stock market reacts negatively when recalls involve less severe hazards.