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Game changer? The impact of the VW emission-cheating scandal on the interrelation between large automakers’ equity and credit markets

Paul A. Griffin and David H. Lont

Journal of Contemporary Accounting and Economics, 2018, vol. 14, issue 2, 179-196

Abstract: This paper investigates the change in the securities market pricing behavior of 16 large, global automakers following disclosure of the Volkswagen (VW) emission-cheating scandal on September 18, 2015, when the EPA issued a notice of violation to VW, stating that VW had intentionally circumvented the US clean air rules for diesel automobile emissions. We contend that this event unblocked an informational cascade, in that much of the information was already known to outside parties, yet no significant market response occurred until the September 18 EPA notice. We also find a significant change in the evolution of equity and credit default swap (CDS) prices in the automobile industry consistent with more-informed trading in the equity market. A test of economic significance further supports this finding by showing a decrease in the profitability of a trading rule based on a predictive relation between CDS spread changes and lagged equity returns.

Keywords: Market interrelation; Informational cascade; Credit default swap spreads; Equity returns; Market disruption; VW emission-cheating scandal (search for similar items in EconPapers)
JEL-codes: D83 G12 G14 G28 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.jcae.2018.05.004

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Journal of Contemporary Accounting and Economics is currently edited by Agnes C.S. Cheng, P. Clarkson, F.A. Gul, Zoltan Matolcsy, Dan Simunic and Ben Srinidhi

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