ResultsWe find that, in our preferred specification, the VW scandal reduced the sales growth rate for non-VW German automakers by 10.4 percentage points in the twelve months following the scandal (as measured by unit sales data from Ward’s Automotive). This decline translated to a loss of 76,000 vehicle sales worth roughly $3.7 billion of revenue for non-VW German automakers, along with a decline in their stock returns relative to expected market outcomes – the cumulative abnormal returns for BMW and Daimler were 6.4 percentage points lower in the two days following the scandal. We arrive at these numbers using a difference-in-differences approach (e.g. Angrist and Krueger 1999) that compares how key outcomes changed over time for the treated group of non-VW German automakers versus the control group of non-German automakers. The differential responses to the scandal provide causal evidence on the scandal’s economic consequences.
Our interpretation of these results is that the scandal harmed the collective reputation of German automakers in the US. To support this interpretation, we proceed in several steps.
- First, we document that the scandal reduced the sales of each non-VW German automaker individually – a 15.1 percentage point lower growth rate for BMW in the twelve months following the scandal, a 6 percentage point lower rate for Mercedes-Benz, and a 30.8 percentage point lower rate for Smart.
- Second, we document a deterioration in positive Twitter sentiment toward the non-VW German automakers. Prior to the scandal, 12.3% of Twitter posts mentioning these automakers displayed positive sentiment. In the two weeks following the scandal, that share declined by 3.5 percentage points.
- Third, we show that our results are not primarily driven by diesel cars, despite the scandal’s origins in the diesel market. The non-diesel cars of non-VW German automakers experienced a sales growth rate decline of 9.6 percentage points, close to our baseline estimate of 10.4 percentage points.
- Finally, we show the robustness of our baseline result across a variety of control groups, including US cars versus non-US, non-German cars; and low-price makes versus high-price makes, etc.
Our results substantiate the opening claim in Tirole (1996) that “[c]ollective reputations play an important role in economics and the social sciences. Countries, ethnic, racial or religious groups are known to be hard-working, honest, corrupt, hospitable or belligerent.” Further, we show that the actions of one member of a group can materially damage the group’s reputation, producing negative reputation externalities from the standpoint of individual firms.
Broader implicationsOur study is related to four additional themes.
First, a recent literature in international macroeconomics (e.g. di Giovanni and Levchenko 2012, di Giovanni et al. 2014, 2015) – emphasises granularity and the importance of large international firms; our results suggest that misbehaviour at such firms can damage the collective reputation of particular national powerhouse industries.
Second, the international economics literature has examined the extent to which taste shocks for domestic versus foreign goods can explain the co-movement of international business cycles (Stockman and Tesar 1995). Our results suggest that the misbehaviour of large multinational firms might generate such taste shocks through reputational spillovers.
Third, our results provide a case study for the recent macroeconomic literature on customer capital; our evidence shows how customer capital can decline through reputational spillovers and quantifies the economic consequences of such a loss (Drozd and Nosal 2012, Gourio and Rudanko 2014).
Fourth, in what Berry et al. (1995) call the ‘characteristics approach’ to demand estimation, researchers must specify what properties of products enter into consumers’ preferences. Our results suggest that country of origin might be an important such attribute, consistent with an existing marketing literature (Newburry 2012).
Concluding remarksThe substantial spillovers we document suggest the need to understand what, if any, policy steps are required to address the centrality of national companies to the reputation of the country as a whole. Our results could provide an argument for policy instruments that would incentivise large companies to internalise their potential reputation spillovers.
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