Crisis Management Through Diversification: Evidence From Product Recalls in an Emerging Market

ABSTRACT Product recalls undermine the performance and legitimacy of recalling firms, making the firms' crisis response strategies critical to their survival and long‐term sustainability. Grounded in legitimacy theory and moving beyond traditional marketing and communication frameworks, this study empirically investigates how firms manage product‐harm crises through diversification strategies. Using a sample of listed firms in a large emerging market, our multivariate regression results reveal that firms respond to product recalls by increasing both the likelihood and extent of diversification, particularly when facing mandatory recalls initiated by regulatory authorities. Additionally, firms with higher media visibility or greater financial resources are more likely to implement diversification strategies following product recalls. Exploring the underlying mechanisms, we find that the observed increase in diversification is primarily driven by upstream and downstream diversification. This aligns with firms' efforts to restore legitimacy by strengthening product quality control, rather than by pursuing operational risk diversification. Finally, we establish the causality using a difference‐in‐differences (DiD) analysis based on mandatory recalls. Collectively, our study demonstrates that corporate diversification serves as an effective product‐harm crisis management strategy in emerging markets, and offers insights into how affected firms rebuild legitimacy through diversification initiatives.