Communications of the IIMA


A major recall is defined as the recall in which the affected number of cars is more than certain threshold level per recall. It has a negative impact on sales, since there are fewer customers inclined to purchase an automobile from a manufacturer that is producing a defective product. This paper introduces the application of event study, used extensively in the area of financial research, to the automobile industry in order to evaluate the sales loss from a major recall. A case study of Toyota Motor Corporation is presented to demonstrate the use of the model. The model suggests that the sales may decline for the subsequent five months from the time a major recall is announced. In future, the assumption of statistical independence between recalls will be removed, and further research will be conducted to determine if this will affect the outcome of the analysis.