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Open Access 05.05.2022 | Original Empirical Research

# Corporate lobbying and product recalls: an investigation in the U.S. medical device industry

verfasst von: Verdiana Giannetti, Raji Srinivasan

Erschienen in: Journal of the Academy of Marketing Science | Ausgabe 5/2022

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## Abstract

While corporate political activity is increasing, its effects on firms’ marketing-relevant outcomes have been largely overlooked in the literature. We propose that corporate lobbying will decrease a firm’s emphasis on product safety and, in turn, increase its product recalls. We further propose that the positive indirect effect of corporate lobbying on a firm’s product recalls via lower emphasis on product safety will be moderated by the firm’s (a) CEO’s functional background and (b) focus on radical (vs. incremental) innovation. We provide empirical support for the proposed model using data on 86 U.S. medical device firms from 2005–2018. The findings extend the literature on the effects of non-market forces on firms’ marketing-relevant outcomes. They also extend the literature on the antecedents of product recalls, which has, hitherto, overlooked the role of non-market forces. The findings on the moderating roles of the firm’s marketing CEO and focus on radical (vs. incremental) innovation generate actionable managerial implications.
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## Supplementary Information

The online version contains supplementary material available at https://​doi.​org/​10.​1007/​s11747-022-00860-z.
Gaia Rubera served as Area Editor for this article.

## Publisher’s note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

## Introduction

The influence of politicians and regulators over firms is substantive and has been growing dramatically. As a result, firms invest considerable time and money to shape their political and regulatory environments (Werner, 2015). One key mechanism by which firms try to influence politicians and regulators is corporate lobbying (Hillman et al., 2004). In this research, we examine the effect of corporate lobbying on product recalls, a marketing-relevant outcome for firms.
From a theoretical perspective, this research is at the intersection of two influential marketing literature streams: (1) the literature on the effects of corporate political activity (Bhagwat et al., 2020), in general, and corporate lobbying (Martin et al., 2018), in particular, on firms’ outcomes; (2) the literature on the antecedents of product recalls. First, the findings from the corporate political activity literature indicate that firms’ corporate lobbying affects shareholder value and risk (Martin et al., 2018). Overlooked is whether firms’ corporate political activity, in general, and corporate lobbying, in particular, affect marketing-relevant outcomes. Vadakkepatt et al. (2022) is a notable exception focusing on customer satisfaction. Second, there is a rich literature on the antecedents of product recalls, which has primarily focused on organization-level antecedents, including organizational learning from prior product recalls (Haunschild & Rhee, 2004; Kalaignanam et al., 2013), R&D intensity and product scope (Thirumalai & Sinha, 2011), CEO stock option pay, tenure, and founder status (Wowak et al., 2015), and presence of a Chief Marketing Officer (CMO) (Kashmiri and Brower 2016). See Cleeren et al. (2017) for a comprehensive literature review. The effects of firms’ non-market strategies, in general, and corporate lobbying, in particular, on product recalls are only now receiving some attention (Rayfield & Unsal, 2019). However, these authors investigate the main effect of corporate lobbying on product recalls and overlook the role of firm heterogeneity in this relationship, a gap we address. We develop and test hypotheses in the U.S. medical device industry, where corporate lobbying is important, because of safety regulations.
This research is also important from a practical perspective. Product recalls in the U.S. medical device industry are, unfortunately, common and increasing (Statista 2018). In 2019, U.S. medical device firms spent U.S. $29 million on corporate lobbying (Center for Responsive Politics 2020), resulting in high political influence in Washington, D.C. (Fang 2018)1. Further, the U.S. Food and Drug Administration (FDA), the federal agency responsible for monitoring the safety of medical devices, has been blamed for not being independent enough, resulting in calls for reform (e.g., Adashi et al., 2019; Patel, 2020). We theorize that corporate lobbying will have a positive effect on a firm’s product recalls and that this effect will be mediated by the firm’s lower emphasis on product safety. Corporate lobbying can lead to privileged relationships between firms and regulatory agencies entrusted with oversight of product safety (Barber & Diestre, 2019). Building on this idea, we propose that corporate lobbying may decrease a firm’s emphasis on product safety in new product development and, in turn, increase the number of its product recalls. Further, we propose a moderated mediation model where the positive indirect effect of corporate lobbying on the number of product recalls via lower emphasis on product safety is moderated by the firm’s (a) CEO’s functional background and (b) focus on radical (vs. incremental) innovation. Applying the upper echelons theory (Hambrick & Mason, 1984) that CEOs’ functional backgrounds shape their firms’ cognitions and strategies (Barker & Mueller, 2002; Bertrand & Schoar, 2003), we propose that a marketing CEO in the firm will result in a focus on the firm’s brands and customers (Paşa & Shugan, 1996), crucial strategic market-based assets to be safeguarded from product recalls, strengthening the negative effect of the firm’s emphasis on product safety on the number of its product recalls. Conversely, we propose that a R&D CEO in the firm will result in a focus on developing sophisticated new products, crucial strategic technology-based assets (Maltz & Kohli, 2000) prone to technical challenges, including safety problems, weakening the negative effect of the firm’s emphasis on product safety on the number of its product recalls. Finally, building on business press evidence from the medical device industry (see e.g., Lenzer, 2017), we propose that an increase in the firm’s focus on radical (vs. incremental) innovation will weaken the negative effect of its emphasis on product safety on the number of its product recalls. To test the proposed second-stage moderated mediation model (where moderators moderate the path between the mediator, i.e., emphasis on product safety, and the dependent variable, i.e., number of product recalls) (see e.g., Arunachalam et al., 2018; Harmancioglu et al., 2021), we collect data from the U.S. FDA Medical Device Product Recalls database (for product recalls), opensecrets.org (for corporate lobbying), BoardEx (for CEOs’ functional backgrounds), ExecuComp (for CEOs’ characteristics), and firms’ 10-Ks (for quality certifications). The final sample consists of an unbalanced panel of 86 U.S. medical device firms (696 firm-years) between 2005 and 2018. The findings, which are robust, indicate that a firm’s corporate lobbying increases the number of its product recalls and that this effect is mediated by the firm’s lower emphasis on product safety. The presence of a marketing CEO and the firm’s focus on radical (vs. incremental) innovation moderate the positive indirect effect of corporate lobbying on the number of product recalls. The findings substantially extend our understanding of the relationship between corporate lobbying and product recalls by (1) clarifying the theoretical mechanism through which corporate lobbying increases the number of product recalls and (2) identifying moderators that strengthen/weaken this relationship. The findings extend the marketing literature centering on non-market forces, which has hitherto focused on the effects of corporate lobbying on shareholder value and risk (Martin et al., 2018), by investigating a novel mechanism, i.e., product recalls, by which corporate lobbying affects firms’ outcomes. The findings also extend the marketing literature on the antecedents of product recalls by highlighting a novel non-market antecedent, i.e., corporate lobbying. In doing so, this research contributes to the debate on relating corporate lobbying to firm performance (e.g., Chen et al., 2015; Hadani & Schuler, 2013) by identifying a mechanism by which corporate lobbying negatively affects firms’ outcomes. Last, the research’s finding on the valuable role of the marketing CEO in amplifying the negative (and beneficial) effect of the firm’s emphasis on product safety on the number of its product recalls extends the literature on the relevance of the firm’s leadership in the new product development context (see e.g., Kashmiri & Mahajan, 2017). The research’s insights that corporate lobbying increases product recalls are managerially relevant. Medical devices’ product recalls are associated with worsened health outcomes and needless medical expenditures for patients and loss of income and reputation for hospitals, doctors, and insurers (Lenzer, 2017; Schulte & Jewett, 2017). For managerial practice, the study’s findings indicate that firms that lobby should counteract the decrease in emphasis on product safety associated with lobbying if they want to reduce product recalls. The findings also generate actionable insights for senior executives on how their corporate governance decisions, with respect to the functional background of the CEO, can affect product recalls. Finally, the findings strike a cautionary note for medical device firms which focus on incremental innovation, as the harmful effect of the decrease in emphasis on product safety associated with corporate lobbying may be especially detrimental to them. ## Corporate lobbying: A brief overview Lobbying has a long history in the U.S. and is protected by the Constitution as a basic right pertaining to “freedom of speech”. At the federal level, lobbying is defined as “any communication made on behalf of a client to members of Congress, congressional staffers, the President, White House staff, and high-level employees of nearly 200 agencies, regarding the formulation, modification, or adoption of legislation” (Center for Public Integrity 2006).2 Lobbying is regulated by the Lobbying Disclosure Act3 of 1995. Corporate lobbying refers to political activities that firms engage in, including spending money to influence government legislators to promote regulatory changes or to protect a beneficial status quo in their industry (Drutman, 2015). In the U.S., there is no limit on firms’ lobbying expenditures, whereas donations to politicians are limited to U.S.$5000 per candidate per election cycle. As a result, corporate lobbying is more pervasive than donations to politicians as a form of corporate political activity (Chen et al., 2015). As corporate lobbying is a primary political tool to sway politicians and/or regulatory agencies, the topic has generated widespread interest from journalists, scholars, and practitioners (Baumgartner et al., 2009).
There is mixed evidence in the literature on the effects of corporate lobbying on firms’ outcomes. Some studies report positive effects of corporate lobbying on firm performance (Chen et al., 2015; Hill et al., 2013), while others report negative effects (Hadani & Schuler, 2013; Igan et al., 2011) or no effects (Hersch et al., 2008; Lenway et al., 1990). In the marketing literature, Martin et al. (2018) find that firms’ corporate lobbying improves shareholder value and decreases (increases) systematic (idiosyncratic) risk, while Vadakkepatt et al. (2022) find that it decreases customer satisfaction. These findings, which suggest a key role of corporate lobbying on firms’ outcomes, call for research on the effects of corporate lobbying on marketing-relevant outcomes. Addressing this research gap, we examine the relationship between firms’ corporate lobbying and product recalls.

## Hypotheses

We first define new product introductions and product recalls in the U.S. medical device industry, following which we develop the hypotheses.

### New product introductions in the U.S. medical device industry

Medical device new product development occurs through both incremental innovation and radical innovation. Every year, the FDA receives about 22,000 submissions for approval of new medical devices. The FDA has two different tracks for granting permissions to firms for marketing new products. In the first track, under Section 510(k) of the Food, Drug and Cosmetic Act, it requires manufacturers to notify their intent to market a medical device at least 90 days in advance, as premarket notification (PMN) under which new devices are cleared for market if they are “substantially equivalent” (SE) to existing products. Many medical devices routinely receive FDA clearance based on clearances of older devices, not subject to rigorous pre-market testing. In the second track, a premarket approval application (PMA) is required. To determine that a device is safe and effective, PMA requires scientific evidence that the health benefits from the intended use of a device outweigh possible risks and that it will significantly improve health outcomes. Hence, the 510(k) process is used primarily for incremental product introductions (Ball et al., 2019). For radical product introductions, the approval process primarily takes the form of pre-market approval (i.e., PMA). Due to their complexity and novelty, these medical devices require evidence of product safety and effectiveness from clinical trials before the FDA grants approval.

### Product recalls in the U.S. medical device industry

The FDA (2021) defines a product recall as “…a firm’s removal or correction of a marketed product that the FDA considers to be in violation of the laws it administers and against which the agency would initiate legal action”. A product recall in the U.S. medical device industry is aimed at removing from the market products in violation of FDA laws. Product recalls, which are triggered by quality failures such as manufacturing defects, functional defects, packaging errors, and software glitches, represent serious threats to the health and well-being of consumers (some defective medical devices can cause fatalities). All medical device recalls are recorded by the FDA. Recent recalls of medical devices include, for example, 465,000 pacemakers by Abbott Inc. in 2017 over concerns about software vulnerabilities (Linsalata, 2017) and 160,775 vial spikes by ICU Medical in 2019 over concerns about plastic burr particulates, which can cause embolism and death (Tiash, 2019).

### Corporate lobbying and product recalls: Indirect positive effect

We propose that a firm’s corporate lobbying will decrease its emphasis on product safety and, in turn, increase the number of its product recalls. Corporate lobbying, by building political ties, may create a privileged relationship between lobbying firms and regulatory agencies (Borisov et al., 2016; Kim, 2019; Schuler et al., 2002). As a result, regulatory agencies may help lobbying firms in their new product approval and introduction processes, eliminating bottlenecks and intermediate steps before new product introduction and lowering quality and safety standards (Barber & Diestre, 2019).
While, at first glance, corporate lobbying may appear to be advantageous for a firm, we argue that it may be a double-edged sword, reducing the firm’s emphasis on the safety of new products and, thereby, increasing the number of its product recalls. Insights from the U.S. medical device industry appear to support this viewpoint. As Dr. Michael Carome,4 Director of Public Citizen Health Research Group, states: “[Medical Device firms] have lobbied hard to see the standards for approval of devices watered down over the years” (2018). Thus, we argue that, as firms’ corporate lobbying increases, they may become more complacent and lower safety standards. A firm’s decreased emphasis on product safety may, in turn, result in the marketing of risky, unsafe products, eventually increasing the number of its product recalls. Integrating the above ideas, we propose H1a and H1b:
H1a
The higher a firm’s corporate lobbying, the higher the number of its product recalls.
H1b
The positive effect of a firm’s corporate lobbying on the number of its product recalls will be mediated by the firm’s lower emphasis on product safety.
In sum, we expect a positive indirect effect of corporate lobbying on the number of product recalls. We note here that, due to the complexity of the context of investigation and to the number of actors involved, we expect lower emphasis on product safety to only partially mediate the effect of corporate lobbying on the number of product recalls.
We next formulate moderated mediation hypotheses, arguing that the positive indirect effect of corporate lobbying on the number of product recalls will be moderated by the firm’s (a) CEO’s functional background (i.e., marketing vs. not, R&D vs. not) and (b) focus on radical (vs. incremental) innovation.

### Moderation effect of CEO’s functional background

The firm’s CEO has the power, and arguably even the obligation, to set the firm’s direction. CEOs influence the strategic priorities of the firm and resource allocation to the activities necessary to implement the strategy (Daft et al., 1988; Lefebvre et al., 1997). Thus, some have argued that the “levers of power [in a firm] are uniquely concentrated in the hands of the CEO” (Nadler & Heilpern, 1998, p. 9). Experience in a function shapes CEOs’ perspective, goal orientations, and time frames, and aligns them with those advanced by the functional discipline (Lawrence & Lorsch, 1967).
According to Dougherty (1992), marketing and R&D each constitute a different “thought world,” that is “a community of persons engaged in a certain domain of activity who have a shared understanding about that activity” (p. 182). With respect to new product development, “marketing’s focus is on meeting customer needs. R&D’s focus is on exploiting new technologies and building “neat” new products” (Maltz & Kohli, 2000, p. 483). As a consequence, we argue that CEOs with backgrounds in marketing or R&D will hold different perspectives on the new product development process and will differentially moderate the effect of a firm’s emphasis on product safety on the number of its product recalls.
Marketing CEO A marketing CEO reflects the importance of brands and customers to the firm’s performance. As marketing expertise is valued in firms with marketing CEOs (Homburg et al., 1999; Paşa & Shugan, 1996), a marketing CEO will make senior managers aware of the key importance of the firm’s brands and customers, crucial strategic market-based assets which must be safeguarded from product recalls. Marketing people are, in fact, focused on customers’ needs and concerned with the impact of new products on the firm’s relationship with customers (Maltz & Kohli, 2000). Accordingly, we expect that the presence of a marketing CEO (vs. not) in a firm will set a stronger tone within the firm that brands and customers are crucial assets to be treated with abundant caution and not to be messed around with by offering products of poor and/or unknown quality. Will the marketing CEO’s perspective be redundant in a firm that already has strong emphasis on product safety? We suggest not, based on developments in the group decision-making literature. The “common knowledge effect” in group decision-making (Gigone & Hastie, 1993) suggests that the influence of an item of information is positively related to the number of group members who have common knowledge of it. Such shared information has an undue influence on group decision-making as it is a common reference point for group members and is weighted more in the group’s judgment. We propose that the importance of protecting brands and customers is common knowledge in a firm with high emphasis on product safety. When such knowledge is shared by the CEO, this should synergistically result in weighting these criteria over others (e.g., time to market, sophistication) in new product decisions. This implies that firms with a CEO with a marketing background will prioritize product safety over technological sophistication to a larger extent than firms with a CEO without a marketing background. Hence, we hypothesize that the negative (and beneficial) effect of a firm’s emphasis on product safety on the number of its product recalls will be stronger for firms with a marketing CEO compared to firms without a marketing CEO. Thus, we propose H2a:
H2a
The presence of a marketing CEO in the firm will strengthen the negative effect of the firm’s emphasis on product safety on the number of its product recalls.
Since emphasis on product safety is more effective in reducing the number of product recalls in firms with a marketing CEO (vs. not), because of the marketing CEO’s tendency to prioritize safety over technological sophistication (see H2a), an increase in corporate lobbying, which reduces emphasis on product safety (see H1b), will be more harmful for firms with a marketing CEO. Compared to firms without a marketing CEO, in fact, firms with a marketing CEO benefit more (in terms of a reduction in the number of product recalls) from higher emphasis on product safety. Hence, we expect here positive moderated mediation, i.e., that the positive indirect effect of corporate lobbying on the number of product recalls via lower emphasis on product safety will be stronger when there is a marketing CEO (vs. not) in the firm. Thus, we propose H2b:
H2b
The presence of a marketing CEO in the firm will strengthen the positive indirect effect of corporate lobbying on the firm’s number of product recalls via lower emphasis on product safety.
Importantly, we highlight that the positive moderated mediation effect arises from the multiplication of the negative effect of the firm’s corporate lobbying on its emphasis on product safety, and the negative interaction effect of a marketing CEO in the firm and its emphasis on product safety on the number of product recalls. We also caution that the hypothesized strengthening of the positive (and harmful) indirect effect of corporate lobbying on the number of product recalls in firms with a marketing CEO (vs. not) does not imply that having a marketing CEO is harmful. Indeed, on the contrary, having a marketing CEO amplifies the negative (and beneficial) effect of emphasis on product safety on the number of product recalls, thereby making the decrease in emphasis on product safety associated with corporate lobbying a “waste” of the benefits potentially associated with having a marketing CEO.
R&D CEO R&D executives and, consequently, R&D CEOs, trained in professional basic scientific fields (e.g., engineering, medicine), have a long-term orientation (Ruekert & Walker, 1987) and are committed to the development of their personal technical skills (Diaz & Gomez-Mejia, 1997). Moreover, R&D executives are also interested in developing their technical reputations with professional R&D communities (Badawy, 1971; Gerpott et al., 1988). Executives with a background in R&D are likely to emphasize product specifications, exploit new technologies, and build ambitious, sophisticated new products (Maltz & Kohli, 2000) that are risky, but a potential source of high sales and profits.
Hence, we anticipate that a R&D CEO (vs. not) will advocate more strongly for the development of ambitious, risky new products, which will increase their personal technical reputation. In the context of new product development, in general, and product recalls, in particular, this implies that firms with a CEO with a R&D background will prioritize product technological sophistication over safety to a larger extent than firms with a CEO without a R&D background. Hence, we hypothesize that the negative (and beneficial) effect of a firm’s emphasis on product safety on the number of its product recalls will be weaker for firms with a R&D CEO compared to firms without a R&D CEO. Thus, we propose H3a:
H3a
The presence of a R&D CEO in the firm will weaken the negative effect of the firm’s emphasis on product safety on the number of its product recalls.
Since emphasis on product safety is less effective in reducing the number of product recalls in firms with a R&D CEO (vs. not), because of the R&D CEO’s tendency to prioritize technological sophistication over safety (see H3a), an increase in corporate lobbying, which reduces emphasis on product safety (see H1b), will be less harmful for firms with a R&D CEO. Compared to firms without a R&D CEO, in fact, firms with a R&D CEO benefit less (in terms of a reduction in the number of product recalls) from higher emphasis on product safety. Hence, we expect here negative moderated mediation, i.e., that the positive indirect effect of corporate lobbying on the number of product recalls via lower emphasis on product safety will be weaker when there is a R&D CEO (vs. not) in the firm. Thus, we propose H3b:
H3b
The presence of a R&D CEO in the firm will weaken the positive indirect effect of corporate lobbying on the firm’s number of product recalls via lower emphasis on product safety.
Importantly, we highlight that the negative moderated mediation effect arises from the multiplication of the negative effect of the firm’s corporate lobbying on its emphasis on product safety, and the positive interaction effect of a R&D CEO in the firm and its emphasis on product safety on the number of product recalls.

### Moderation effect of focus on radical (vs. incremental) innovation

An interesting feature of the medical device industry is its ability to clearly differentiate between different types of innovation (i.e., incremental vs. radical) via different approval processes (i.e., 510(k) vs. PMA). Radical new product introductions, in the medical device industry, the result of the PMA process, are novel and complex products using new technology. They typically require substantial costs, resources, and time to commercialize, and may result in uncertainty and high risk to patients (Macher, 2006). Coherently with the novelty and complexity of radical new product introductions, to determine that a device is safe and effective, the PMA process requires rigorous pre-market testing, i.e., scientific evidence that the health benefits from the intended use of a device outweigh possible risks and that it will significantly improve health outcomes. Conversely, incremental new product introductions, the result of the 510(k) process, are less complex and demonstrably similar (“substantially equivalent”) to medical devices that have already received FDA approval (Ball et al., 2019), being therefore based on the redeployment of pre-existing knowledge to new products. Critics contend that the 510(k) process, not requiring any rigorous pre-market testing, results in the marketing of unsafe products, potentially harming consumers’ health. Using FDA’s high-risk List of Device Recalls from 2005 through 2009, Zuckerman et al. (2011) conclude that “Most medical devices recalled for life-threatening or very serious hazards were originally cleared for market using the less stringent 510(k) process or were considered so low risk that they were exempt from review (78%)” (p. 1006). A problem, we add, which is exacerbated by many medical devices routinely receiving FDA clearance based on clearances of older devices, themselves not subject to rigorous pre-market testing.
We argue that the negative (and beneficial) effect of a firm’s emphasis on product safety on the number of its product recalls will be weakened by the higher firm’s focus on radical (vs. incremental) innovation. We in fact conjecture that, contrary to general wisdom, an increase in the firm’s emphasis on product safety will be particularly beneficial for firms that focus their new product development efforts on introducing primarily incremental new products. Due to the absence of rigorous pre-market testing, in fact, potential safety problems are less likely to be picked up during the pre-marketing phase of incremental new products, thereby making firm’s emphasis on product safety paramount in preventing product recalls for firms with a focus on incremental (vs. radical) innovation. Thus, we propose H4a:
H4a
An increase in the firm’s focus on radical (vs. incremental) innovation will weaken the negative effect of the firm’s emphasis on product safety on the number of its product recalls.
Since emphasis on product safety is less effective in reducing the number of product recalls in firms with higher focus on radical (vs. incremental) innovation, because of the more rigorous pre-market approval process for radical innovations (see H4a), an increase in corporate lobbying, which reduces emphasis on product safety (see H1b), will be less harmful for firms with a higher focus on radical innovation. Compared to firms with a lower focus on radical innovation, firms with a higher focus on radical innovation benefit less (in terms of a reduction in the number of product recalls) from higher emphasis on product safety. Hence, we expect here negative moderated mediation, i.e., that the positive indirect effect of corporate lobbying on the number of product recalls via lower emphasis on product safety will be weaker when focus on radical (vs. incremental) innovation increases. Thus, we propose H4b:
H4b
An increase in the firm’s focus on radical (vs. incremental) innovation will weaken the positive indirect effect of corporate lobbying on the firm’s number of product recalls via lower emphasis on product safety.
We note that the negative moderated mediation effect arises from the multiplication of the negative effect of the firm’s corporate lobbying on its emphasis on product safety, and the positive interaction effect of the firm’s focus on radical (vs. incremental) innovation and its emphasis on product safety on the number of product recalls.
We report our conceptual framework in Fig. 1.

## Data and method

### Data

To test the hypotheses, we first collected data from Compustat on firms in the Standard Industry Classification (SIC) codes of 3841 (Surgical and Medical Instruments and Apparatus), 3842 (Orthopedic, Prosthetic and Surgical Appliances and Supplies), 3843 (Dental Equipment and Supplies), 3844 (X-ray Apparatus and Tubes and related Irradiation Apparatus), 3845 (Electromedical and Electrotherapeutic Apparatus), and 3851 (Ophthalmic Goods) between 2004 and 2017. We then collected data on firms’ product recalls between 2005 and 2018 from the FDA Medical Device Recalls database. Building on past research (Thirumalai & Sinha, 2011), to avoid overcounting product recalls, we only retain one recall when a firm experiences more than one recall with the same “root cause” on the same day. Then, we collected data on firms’ corporate lobbying expenditures from opensecrets.org. We collected data on CEOs’ functional background using BoardEx. When information was not available in BoardEx (e.g., a gap in a CEO’s record), we obtained data on CEOs’ professional backgrounds from other sources including ExecuComp, LinkedIn, Bloomberg, Equilar, and firms’ corporate websites, proxy statements, and 10-Ks. We also collected data on firms’ quality certifications from their 10-Ks. Last, we collected data on other CEOs’ characteristics from ExecuComp. After merging the data from various sources, we had an unbalanced panel of 696 firm-years for 86 publicly-listed medical device firms. This sample size is consistent with past research on the role of corporate governance in product recalls (see e.g., Kashmiri and Brower 2016).

### Measures

Dependent variable
The dependent variable is the number of product recalls for a firm each year. The firms in our sample had a total of 3,145 product recalls. The firms with the highest number of product recalls were Stryker (488), followed by Medtronic (410) and Zimmer Biomet (371). Some firms had no product recalls between 2005 and 2018 (e.g., MSA Safety). Therefore, the number of product recalls is an over-dispersed count variable (mean = 4.52, standard deviation = 9.18) ranging between 0 and 76 (where zeros account for 41.24% of observations).
Independent variable
Following empirical precedents in political science (Borisov et al., 2016), we measured a firm’s corporate lobbying by its corporate expenditures in FDA lobbying in U.S. dollars each year. As corporate lobbying has carryover effects (Martin et al., 2018), we use a finite distributed lag model to compute corporate lobbying stock, with earlier years of lobbying receiving a lower weight. We use a decay parameter (𝛿) of 0.50. In order to preserve sample size, we use corporate lobbying for three consecutive years. Specifically, corporate lobbying for year t is defined as $$\sum \limits_{k=t-2}^{k=t}{\delta}^{t-k}x\ {Corporate\ Lobbying}_k$$ (Dutta et al., 1999) relative to the book value of firm i’s assets in year t (Martin et al., 2018). We subsequently establish the sensitivity of results to alternative decay parameters. The variable has a high incidence of zeros (83.62%)5 which is consistent with past research that most publicly listed U.S. firms (90%) do not lobby (Drutman, 2015).
Mediator
Following empirical precedents (see e.g., Kashmiri and Brower, 2016), for each firm-year we used the presence or absence of the firm’s ISO 13485 quality certification to measure the firm’s emphasis on product safety (57% of firm-years). This data was obtained from the companies’ 10-Ks. ISO 13485 (Medical devices - Quality management systems - Requirements for regulatory purposes) is an ISO standard, specific to the medical device industry, representing the requirements for a comprehensive quality management system for the design and manufacture of medical devices.
Moderators
We classified a CEO as a Marketing CEO using a dummy variable equal to 1 (0 otherwise) if the CEO has prior functional experience in either the marketing or sales functions, which we obtained from their past job titles (35% of CEO-years). Following a method of classification of functional experience in prior research (e.g., Finkelstein & Hambrick, 1996; Nath & Mahajan, 2008), we used marketing- or sales-related words (e.g., marketing, sales, and customer) in CEOs’ previous job titles as evidence of their marketing experience. We proceeded analogously for the R&D CEO (14% of CEO-years) using R&D-related words (e.g., R&D, research, and technology). We measured firm’s focus on radical (vs. incremental) innovation by the firm’s annual number of devices introduced through the PMA process scaled by the total number of devices (PMAs and 510(k)s) introduced by the firm. Both terms are obtained using the same finite distributed lag model detailed above for corporate lobbying stock. We set the value to 0.50 for those firms that did not innovate in the period of interest.
Control variables
We include a number of control variables in the model used to test the hypotheses. We provide descriptions and sources for all variables in Table 1 and the descriptive statistics and correlation matrix in Table 2. We provide the logic for the inclusion of the control variables in Table W1 in Web Appendix 1. All variance inflation factors are well below 10 indicating no threat from multicollinearity.
Table 1
Variables, measures, and sources
Variable
Measure
Data Source
Number of Product Recalls
Firm’s annual number of product recalls
FDA Recalls database
Corporate Lobbying
Firm’s corporate lobbying targeted at the FDA in US $, used in a finite distributed lag model with a decay parameter of 0.50 and three lags, scaled by assets opensecrets.org Emphasis on Product Safety 1 (0 otherwise) if the firm holds ISO 13485 certification 10-Ks Marketing CEO 1 (0 otherwise) if the CEO has prior functional experience in either the marketing or sales functions BoardEx and ExecuComp R&D CEO 1 (0 otherwise) if the CEO has prior functional experience in the R&D function BoardEx and ExecuComp Focus on Radical (vs. Incremental) Innovation Firm’s annual number of devices introduced through the PMA process scaled by the total number of devices (PMAs and 510(k)s) introduced by the firm. Both terms are obtained using a finite distributed lag model with a decay parameter of 0.50 and three lags. The variable takes on a value of 0.50 for firms that did not innovate in the three-years period. FDA PMA database & 510(k) database Corporate Lobbying - Other Firm’s corporate lobbying targeted at agencies other than the FDA in US$, used in a finite distributed lag model with a decay parameter of 0.50 and three lags, scaled by assets
opensecrets.org
Size
Total assets
Compustat
Compustat
Compustat
Extent of Labor Use
Number of employees scaled by assets
ROA
Net income scaled by assets
Tobin’s Q
Tobin’s Q computed as per Chung and Pruitt (1994)
Compustat
Number of Incremental Innovations
Firm’s number of 510(k)s, used in a finite distributed lag model with a decay parameter of 0.50 and three lags, scaled by assets
FDA 510(k) database
Number of Radical Innovations
Firm’s number of PMAs, used in a finite distributed lag model with a decay parameter of 0.50 and three lags, scaled by assets
FDA PMA database
R&D Intensity
R&D expenditure scaled by sales
Compustat
Compustat
Compustat
Advertising Intensity
Advertising expenditure scaled by sales
Slack Resources
Total assets scaled by liabilities, logged
Financial Distress
Altman’s Z (Altman, 1968)
Compustat
Financial Leverage
Long term debt scaled by book value of common equity
Compustat
Democratic Power
A count variable ranging between 0 and 3. The variable takes on a value of 3 if the President is a Democrat and both the House of Representatives and the Senate are controlled by Democrats
U.S. Gov
CEO Tenure
Difference between current year and year of appointment as CEO, logged
Boardex and ExecuComp
CEO Stock Options Pay

## Limitations and opportunities for further research

First, we conducted our empirical investigation in the U.S. medical device industry, which allows a clean test of the hypotheses without noise from cross-industry variations. However, this context precludes consideration of industry characteristics (e.g., uncertainty, customer involvement) that may affect new product development and product recalls. Future work relating corporate lobbying to product recalls in other industries can establish this study’s generalizability. Second, following precedent in the marketing literature on product recalls, we used secondary data to test the hypotheses. A potential research opportunity is to study product recalls using primary data methods, including surveys and in-depth interviews of managers. Third, while we focus on corporate lobbying, corporate political activity can take other forms (e.g., PAC contributions). Future research on the effects of other forms of corporate political activity would be an interesting research extension. Last, the proposed mediator, i.e., lower emphasis on product safety, only partially explains the direct effect of corporate lobbying on the number of product recalls. We conjecture that, in addition to decreasing emphasis on product safety, corporate lobbying may lead to easier FDA approvals of new products (see Rayfield & Unsal, 2019), resulting in more product recalls. Hence, there is room for future work accounting for such direct effect. In an additional analysis, we find that lobbying aimed at agencies other than the FDA has a positive indirect, although only marginally significant, effect on the number of product recalls. This effect is indirect-only via lower emphasis on product safety. This confirms our intuition that the unexplained mechanism between the direct effect of FDA lobbying on the number of product recalls is best explained focusing on the FDA side of the process. Notwithstanding this, future research could also try to investigate, among others, whether lobbying results in lower attention to customers/customer-focus (Umashankar et al., 2022; Vadakkepatt et al., 2022), eventually leading to an increase in product recalls.
In sum, this research takes a step toward exploring the effect of firms’ non-market strategies and finds that corporate lobbying can lead to undesirable marketing-relevant outcomes, i.e., product recalls. We hope this research stimulates future work relating corporate political activity to other marketing-relevant outcomes.

## Declarations

### Conflict of interest

The authors declare that they have no conflict of interest.
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## Appendix

Table 5
Robustness checks
 Panel A1 Endogeneity Correction No Decay Dependent Variable: Emphasis on Product Safety Number of Product Recalls Emphasis on Product Safety Number of Product Recalls Corporate Lobbying −.004 (.003)* .002 (.001)** −.001 (.0004)** .001 (.0003)*** Emphasis on Product Safety −.34 (.16)** −.33 (.16)** Emphasis on Product Safety × Marketing CEO −.61 (.26)** −.59 (.26)** Emphasis on Product Safety × R&D CEO −.37 (.38) −.39 (.38) Emphasis on Product Safety × Focus on Radical (vs. Incremental) Innovation 2.21 (.90)** 2.42 (.90)*** Log pseudo-likelihood −134.43 −1,253.56 −134.20 −1,253.23 Panel A2 Excluding Class III Recalls Recall Root Cause Dependent Variable: Emphasis on Product Safety Number of Product Recalls Emphasis on Product Safety Number of Product Recalls Corporate Lobbying −.001 (.0005)** .001 (.0003)*** −.001 (.0005)** .001 (.0003)*** Emphasis on Product Safety −.40 (.17)** −.37 (.16)** Emphasis on Product Safety × Marketing CEO −.60 (.27)** −.61 (.27)** Emphasis on Product Safety × R&D CEO −.32 (.38) −.25 (.38) Emphasis on Product Safety × Focus on Radical (vs. Incremental) Innovation 2.54 (.92)*** 2.33 (.90)*** Log pseudo-likelihood −135.13 −1,212.21 −135.13 −1,230.61
Notes: *p < .10. **p < .05. ***p < .01.. Unstandardized parameter estimates and standard errors in parentheses. The models are random effects models and include a constant. Control Variables are omitted in the interest of brevity
Endogeneity concerns We used lagged independent variables to account for reverse causality. Further, we included time fixed effects in all our equations to alleviate potential concerns due to omitted variables. However, corporate lobbying may be endogenous as firm-level omitted variables (e.g., organizational culture) may affect both corporate lobbying and product recalls. To address this potential bias, we re-ran our analysis using a control function approach (Petrin & Train, 2010). To instrument the suspect endogenous variable, we ran a random effects panel regression of firms’ corporate lobbying on the average donations to political campaigns of other firms (Barber & Diestre, 2019) in our sample (computed using the same stock measure employed before for corporate lobbying) and, for completeness, the focal firm’s donations to political campaigns (year fixed effects are also included). We expect other firms’ donations to be correlated with the focal firm corporate lobbying as (a) political donations are correlated with corporate lobbying because firms that are politically active in one dimension are also active in other dimensions (Barber & Diestre, 2019; Hillman et al., 2004; Ridge et al., 2017) and (b) decisions on donations are taken in similar environments, with firms facing similar challenges and opportunities (see Germann et al., 2015 for a similar logic). Other firms’ donations also meet the exclusion restriction as peer firms’ decisions of supporting a candidate are unlikely to affect a firm’s emphasis on product safety and number of product recalls (Barber & Diestre, 2019).
The results, available upon request from the authors, indicate that peer firms’ donations significantly predict a firm’s corporate lobbying (p < 0.05). For hypotheses testing, we estimate the models of emphasis on product safety and number of product recalls including the error from the instrumental variable equation (Petrin & Train, 2010). Results are robust to the endogeneity correction (Columns 1 and 2, Panel A1, Table 5), although the main effect of corporate lobbying on emphasis on product safety is only marginally significant.
Measure of corporate lobbying We first checked the robustness of the results to alternative decay parameters (0.4, 0.6). The results, available upon request from the authors, do not change. The results are also robust when no decay parameter is used (see Columns 3 and 4, Panel A1, Table 5).
Recall class When a manufacturer faces a product safety problem and recalls a medical device, the FDA evaluates the health risk presented by the recalled device and classifies the recall as a class I, class II, or class III recall, all of which are included in the dependent variable. To examine the robustness of the results to the definition of product recalls, we excluded class III recalls (i.e., recalls with minimal adverse health consequences) from the dependent variable. The results, reported in Columns 1 and 2, Panel A2, Table 5, do not change.
Recall root cause To examine the robustness of the results to the definition of product recalls and provide indirect support for our mechanism, we re-ran the main model excluding recalls due to equipment maintenance and employees’ and users’ errors. The results, reported in Columns 3 and 4, Panel A2, Table 5, do not change.9
Ruling out reverse causality To further rule out reverse causality of product recalls on corporate lobbying, we ran a Granger Causality Test with three lags using the user-generated Stata command pvar (Abrigo & Love, 2015). The null hypothesis that product recalls do not Granger-cause corporate lobbying cannot be rejected at the 90% confidence level (p > 0.10). We further ruled out reverse causality of product recalls on emphasis on product safety (p > 0.10) and focus on radical vs. incremental innovation (p > 0.10).
Effect of non-FDA corporate lobbying Results reported in Column 1, Table 3, show that corporate lobbying aimed at agencies other than the FDA also reduces a firm’s emphasis on product safety. As emphasis on product safety reduces the number of product recalls (Columns 3 and 4, Table 3) and given that the effect of corporate lobbying aimed at agencies other than the FDA is not significant when controlling for emphasis on product safety, we are in the presence of indirect-only mediation, meaning that the positive indirect effect of non-FDA corporate lobbying on the number of product recalls is fully mediated by reduced emphasis on product safety. We checked the significance of the indirect effect using a bootstrapping procedure (500 replications). The indirect effect of corporate lobbying aimed at agencies other than the FDA on the number of product recalls via lower emphasis on product safety is positive and marginally significant (p < 0 .10) while the direct effect is not significant (p > 0.10).
Fußnoten
1
Fang, L., Journalist, The Intercept. From “The Bleeding Edge” (Dick, 2018), Retrieved September 20th 2020 from Netflix.​com.

4
Carome, M., Director of Public Citizen Health Research Group. From “The Bleeding Edge” (Dick, 2018), Retrieved September 20th 2020 from Netflix.​com.

5
Please note that, consistent with Martin et al. (2018), our measure of corporate lobbying only includes firms’ individual expenditures. Firm’s contributions to collective efforts (via the main lobbying group in the industry, Advamed), are not included as we focus on only one industry.

6
We also estimated a model of number of product recalls with only corporate lobbying (and year fixed effects) as a predictor. Corporate lobbying increases the number of product recalls (p = 0.05).

7
We are thankful to an anonymous reviewer for this suggestion.

8
We do not include the R&D CEO’s interaction with emphasis on product safety in our generalized structural equation model as the effect is not statistically significant in Column 4, Table 3.

9
Results do not change if we also exclude packaging- and label-related recalls.

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Metadaten
Titel
Corporate lobbying and product recalls: an investigation in the U.S. medical device industry
verfasst von
Verdiana Giannetti
Raji Srinivasan
Publikationsdatum
05.05.2022
Verlag
Springer US
Erschienen in
Journal of the Academy of Marketing Science / Ausgabe 5/2022
Print ISSN: 0092-0703
Elektronische ISSN: 1552-7824
DOI
https://doi.org/10.1007/s11747-022-00860-z

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