The contagion effect of environmental violations: The case of Dieselgate in Germany

Abstract

We examine how environmental violations affect the stock returns of the violating firm and how these financial implications then spread to industry peers. Volkswagen's diesel emissions scandal (Dieselgate) and the German automotive industry serve as a seminal case for the examination. Research often limits examinations of corporate environmental scandals to the primary event announcement. Yet the Dieselgate scandal exhibits a processual character that requires the examination of multiple events over time. We identify 10 Dieselgate events and employ event study methodology to detect abnormal stock reactions. Based on agency and signaling theory, the results indicate that Dieselgate has harmed the stock returns of Volkswagen and its industry peers substantially. Surprisingly, Volkswagen suffered financial damage only upon the initial event of Dieselgate. Subsequent events had significant effects only on industry peers. These findings contribute comprehensively to the research of environmental misconduct and provide valuable implications for practitioners.

The Impact of Dieselgate on the Required Rate of Return on Equity of VW, BMW and Daimler

“…As soon as the markets absorbed and processed the initial information of the Dieselgate scandal, they sent a signal (according to signaling theory) that the problems with diesel engines will not be an isolated issue but will constitute a much weightier problem, mainly in the context of other legislative arrangements regarding the environment that are gaining importance in the beginning of the 21 st century. Surprisingly, it shows (Bouzzine & Lueg, 2020) that to expect that in the context of this development the return required on equity investments would soar. However, our research of historical market betas has not confirmed this expectation.…”

“…On the other hand, FORMAL COMMENCEMENT 2016 seemed to have a bigger impact on Daimler and BMW. Also, the study of Bouzzine and Lueg (2020) shows that VW suffered its biggest loss of market share values soon after EPA NOTICE 2015. It seems that the events which followed (VW's fine in the USA, investigation in Germany and the EU connected with fines and the subsequent crusade against diesels) did not have such a significant impact on the VW shares' value as in the early stage of the Dieselgate scandal.…”

“…Share market data indicates that markets reacted to the Dieselgate scandal with some time delay and absorbed subsequent events that this scandal produced in the USA and then in Europe as well. Similar to the study by Bouzzine and Lueg (2020), we can work with the agency theory (principal -agent theory) leading to moral hazard and subsequently to the fraudulent practices of VW. However, from the perspective of our study, the application of signaling theory is more relevant.…”

“…This period also covers FORMAL COMMENCEMENT 2016, when the U.S. Department of Justice first sued Volkswagen on behalf of the EPA. Bouzzine and Lueg (2020), who conducted the study of how the Dieselgate scandal affected the stock returns of VW and its industry peers, developed a framework We used daily adjusted closing prices of BMW, Daimler, and VW from the period 2010 -2019 to calculate the return of the shares in question published by http://finance.yahoo.com. Adjusted close (adjusted closing price) is the closing price of the shares adjusted for applicable splits, new stock offerings, and dividend distributions.…”

The Role of Top Managers in Implementing Corporate Sustainability—A Systematic Literature Review on Small and Medium-Sized Enterprises

“…Underlining the assumption of an enterprise's overall market-and profit-orientation, SMEs' adaption of CS could be additionally explained by economic motives (Bouzzine and Lueg 2020;Fraj-Andrés et al 2012;Lueg et al 2019). In this regard, Murillo and Lozano (2006) analyzed SMEs in a French and Spanish setting.…”