A recent Kansas State University study found that five major factors have the greatest financial impact on a company involved in a meat or poultry recall. recall-meat-iphoneThose factors — perceived health risk severity, recall size, firm size, firm’s experience with recalls, and media coverage — ended up having the most impact on the recalling company’s stock market price, according to the study by Ted Schroeder, K-State professor of agricultural economics, and Veronica Pozo, assistant professor of applied economics at Utah State University. The researchers looked at meat and poultry recalls between 1994-2013 using data from the USDA Food Safety and Inspection Service. There were more than 1,200 meat and poultry recalls during that period, with 163 of them involving 31 different publicly traded companies. Those publicly traded firms accounted for nearly half the total recalled meat and poultry products, Pozo said, making up about 43 percent (277 million pounds) of the 638 million pounds of total recalled products during the period studied. The researchers examined reactions in the stock market following a recall event, which indirectly reflect a firm’s private costs. “Some recalls would have gotten out to the consumer, and some would not have,” Pozo said. “Regardless, calculating the actual physical cost of a recall can be quite daunting. You have to track volume of product, determine if the product was disposed of or the firm got an alternative value for it, and the cost of all people involved, including sales losses and liability costs.” At the same time, public costs, such as illnesses stemming from a recall, are not reflected in stock prices, Schroeder noted. The study revealed that it took an average of four to five days for a recalling firm’s stock price to reflect the event. However, if the recall was considered a major health hazard, the market hit could potentially occur within one day and result in greater financial loss. “Our results show investors do respond fairly quickly, within the day of the recall or as soon as the markets open after the recall,” Schroeder said. “As the recall continues to unfold, the market will adjust, and it’s either going to go down further or readjust back up if the confidence and handling of the recall is made known.” The study found that these five factors had the greatest impact on a recalling public company’s stock price: Severity: Class I recalls are those considered to pose a major health hazard, compared to Class II and Class III recalls. The researchers found the perceived seriousness of the human health risk, such as those posed by E. coli O157:H7, Salmonella or Listeria, would impact shareholder losses to the greatest extent. Recall size: The larger the recall, the more financial damage the firm would face, according to the researchers. Therefore, firms may want to test products in smaller lot batches to help prevent a large-scale recall, but costs to implement this practice would need to be considered. Firm size: Larger and more diverse companies may be able to absorb some of the financial costs from a larger Class I recall, the researchers said. However, their insurance premiums were likely to go up. Also, a larger and more diversified firm wouldn’t be as financially impacted as a smaller publicly traded firm that relies heavily on a recalled meat or poultry product as its main line of business and may face bankruptcy from one such recall. Firm’s experience: If a company had one recall and then another within a short period, the researchers found that while there would still be a negative impact from the second recall, it might not be as bad if the first recall had been handled well. Media: Media coverage impacts how a recall company is perceived, the researchers found.  The more coverage about the recall event, the more damage it could cause the recalling firm. While most such articles were informative, they also left a negative impression, so food companies may want to develop a media plan in case of a recall.