The Corporate Social Responsibility of Pharmaceutical Product Recalls:
An Empirical Examination of U.S. and U.K. Markets |
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Authors: | Eng Tuck Cheah Wen Li Chan Corinne Lin Lin Chieng |
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Institution: | (1) Nottingham University Business School, Faculty of Social Sciences and Education, University of Nottingham, Malaysia Campus, Jalan Broga, Semenyih, Selangor, 43500, Malaysia |
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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.
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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Keywords: | corporate social responsibility pharmaceutical industry product recalls shareholder wealth UK and US comparison |
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