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The Corporate Social Responsibility of Pharmaceutical Product Recalls: An Empirical Examination of U.S. and U.K. Markets

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Abstract

The pressure on companies to practice corporate social responsibility (CSR) has gained momentum in recent times as a means of sustaining competitive advantage in business. The pharmaceutical industry has been acutely affected by this trend. While pharmaceutical product recalls have become rampant and increased dramatically in recent years, no comprehensive study has been conducted to study the effects of announcements of recalls on the shareholder returns of pharmaceutical companies. As product recalls could significantly damage a company’s reputation, profitability and brand integrity, this paper investigates the effect on shareholder wealth and the extent to which the adoption of CSR practices by pharmaceutical companies in the United Kingdom (U.K.) and the United States (U.S.), the two largest markets for pharmaceutical products in the world, affected market reactions surrounding product recall announcements. The analysis of product recall announcements from 1998 to 2004 compiled from The Pharmaceutical Journal and U.S. Food and Drug Administration enforcement reports revealed marked differences in the way market participants in the two countries responded to news of product recalls. U.S. investors penalised firms according to the severity of product defects while U.K. investors were indifferent. While U.K. investors rewarded product recalls by firms which were not usually CSR-active, U.S. investors punished non-CSR active firms that performed recalls. These observations could pose strategic challenges to pharmaceutical firms operating in both countries.

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Abbreviations

ANOVA:

analysis of variance

CSR:

corporate social responsibility

FDA:

United States Food and Drug Administration

MHRA:

Medicines and Healthcare Products Regulatory Agency

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Acknowledgements

Parts of this paper were presented at the `Corporate Social Responsibility Agendas for Asia' conference held in Kuala Lumpur, Malaysia on 13 and 14 April 2006, organized by the International Centre for Corporate Social Responsibility, Nottingham University Business School. The authors would like to thank two anonymous reviewers for their valuable insights.

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Authors and Affiliations

  1. Nottingham University Business School, Faculty of Social Sciences and Education, University of Nottingham, Malaysia Campus, Jalan Broga, Semenyih, Selangor, 43500, Malaysia

    Eng Tuck Cheah, Wen Li Chan & Corinne Lin Lin Chieng

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  1. Eng Tuck Cheah
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  2. Wen Li Chan
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  3. Corinne Lin Lin Chieng
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Correspondence to Eng Tuck Cheah.

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Jeremy Cheah is an Assistant Professor of Finance at Nottingham University Business School, Malaysia Campus. His research interests lie in the area of applied corporate finance and investment management.

Wen Li Chan was an Advocate and Solicitor in Kuala Lumpur, Malaysia before assuming the post of University Teacher in Information Systems and Strategy at Nottingham University Business School, Malaysia Campus. She is currently investigating the roles and implications of information on firm valuation, particularly in the area of corporate cyber-litigation and corporate social responsibility.

Corinne Chieng is a Corporate Executive at Star Publications (M) Berhad, Malaysia. She has previously worked as a tax consultant at Arthur Andersen Malaysia. Her research interests include the financial implications of corporate social responsibility on the valuation of firms.

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Cheah, E.T., Chan, W.L. & Chieng, C.L.L. The Corporate Social Responsibility of Pharmaceutical Product Recalls: An Empirical Examination of U.S. and U.K. Markets. J Bus Ethics 76, 427–449 (2007). https://doi.org/10.1007/s10551-006-9292-1

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