Abstract
This study examines spillover effects following Volkswagen’s admission of emissions cheating. We first estimate initial operational losses of 8.45% of Volkswagen’s equity market capitalization on the date before the announcement, reputational losses up to five times these losses, and significant negative shocks to its stocks and bonds. Analyzing spillover effects from this shock beyond the usually only measured losses in equity value, we find significant negative net spillover effects to European competitors and suppliers in both stock and bond markets. Studying the economic effects in more detail, we show that Volkswagen’s total losses of 27.4 billion euros in terms of changes in equity market values over the first five event days are almost entirely composed of abnormal losses. Furthermore, competitors (suppliers) overall suffered 18.3 (12.6) billion euros of abnormal losses during this time, with 60% (69%) of the firms exhibiting negative changes, especially European competitors and suppliers connected to Volkswagen. These figures are further increased by negative bond market value changes. Overall, our results strongly emphasize that neglecting debt holders losses can lead to an underestimation of such events.
Highlights
On September 20, 2015, after an accusation by the U.S Environmental Protection Agency (EPA), Volkswagen admitted in a public statement to illegally installing a so-called defeat device in certain diesel cars
This study examines spillover effects following Volkswagen’s admission of emissions cheating
To ensure that our results in bond markets are robust, we repeat all analyses on stocks and bonds based on credit default swaps (CDS)
Summary
On September 20, 2015, after an accusation by the U.S Environmental Protection Agency (EPA), Volkswagen admitted in a public statement to illegally installing a so-called defeat device in certain diesel cars. We focus on the effects on Volkswagen itself, on Volkswagen’s competitors, and on suppliers to the automotive industry worldwide When measuring these spillover effects as changes in market value, we employ stock returns and bond returns. We find significant negative net spillover effects for European competitors and suppliers for stocks and bonds, indicating that the Volkswagen emissions scandal was not a shock to the car manufacturing industry in general,. Following Merton (1974), equity option-implied volatilities (as a proxy for asset volatility) may trigger a relative shift in firm value from debt holders towards equity holders This might be one explanation why European competitors show stock returns recovering to pre-event levels in the considered event windows, whereas abnormal bond returns do not.
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