Date of Award

January 2015

Document Type

Thesis

Degree Name

Master of Science (MS)

Department

Economics & Finance

First Advisor

Daniel Biederman

Abstract

Motor vehicle recalls occur frequently in the United States. The number of motor vehicles being recalled has been increasing substantially over time. This paper examines whether the number of vehicles recalled per month has an effect on the shareholder’s monthly abnormal return. Monthly abnormal return is the return which cannot be explained by the overall movement of the market. Five major auto manufacturers are included in this analysis with data ranging from April 2005 to December 2014. Two techniques are used in this paper; first, I use a series of ordinary least squares models followed by a series of mean comparison t-tests. Overall, the results indicate that the number of vehicles recalled per month provides little explanatory power of monthly abnormal returns. The one exception is Ford, from which the OLS results indicate that a 10 percent increase in the amount of vehicles recalled (initiated by the manufacturer) result in a 7.8 percent decrease in abnormal return. However, this result became weaker in significance and magnitude with the addition of control variables. The majority of the results indicate that the number of recalled vehicles does not affect shareholder’s monthly abnormal return. It is likely that other attributes are more important and this suggests that direct costs of recalls are minimal. The results support the previous literature of Rupp (2003), who found the number of vehicles recalled had an insignificant effect on abnormal return using data from 1973-1998.

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