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

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 aseminal case for the examination. Research often limits examinations of corporateenvironmental scandals to the primary event announcement. Yet the Dieselgate scandal exhibits a processual character that requires the examination of multiple events overtime. 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 misconductand provide valuable implications for practitioners.