Defective Product Recalls and Corporate Financing Costs: Insights From New Energy Vehicle Recalls

ABSTRACT

Defective vehicle recalls constitute an important institutional arrangement for ensuring driving safety and protecting consumer rights. While China's new energy vehicle market has expanded rapidly, the extent to which large‐scale defective vehicle recalls affect corporate debt cost premia remains unclear. Using 80 quarters of recall data disclosed by the State Administration for Market Regulation, this study employs the CSDID estimator and event study methods to examine the impact of defective product recalls on firms' debt financing costs. The main contributions and findings are as follows: (1) based on data disclosed by the State Administration for Market Regulation, we manually process more than 2000 unstructured recall announcements and, for the first time, construct a comprehensive and systematic dataset on the number and proportion of automobile recalls in China over time, thereby documenting the distinctive features of China's recall system; (2) within the event window, defective vehicle recalls convey negative signals to the market, alter creditors' prior beliefs, and generate a debt risk premium, thereby increasing firms' debt financing costs; (3) credit ratings serve as an important mechanism through which recall events raise debt costs; (4) firms with higher default risk are more vulnerable to recall shocks and experience a greater increase in debt financing costs. This study provides a new empirical perspective on reputation capital theory with evidence from the Chinese market and suggests that firms should strictly control product quality and enhance transparency in manufacturing standards to maintain brand reputation.