Can someone explain to me why the stock price of Volkswagen dropped when the pollution scandal was publically known? I know they have to pay massive fines which for example takes away money from reinvestments and also makes Volkswagen more illiquid.

But how excatly does this affect the share price? What are the mechanisms?

  • 2
    Welcome to Money.SE. Can you give us a hint to your investing experience? Specifically, do you own mutual funds, individual stocks, etc? There are probably 3 levels to answer to this question, all valid, but addressed at varying levels of complexity. – JTP - Apologise to Monica Feb 12 '17 at 16:58
  • Very little experience with investing, yet. I know have a good knowledge in economics, but not finance – Moaa Feb 12 '17 at 17:38

The prices dropped because the scandal could mean:

  • fewer sales going forward
  • people returning cars
  • fines

This some people estimated that the company could lose money, or have smaller profit. Thus each share was worth less money going forward.

The mechanism is that in order to sell their shares the current share owners had to settle for lower prices.

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    Note that one direct way in which this could reduce the value of a share would be to lower or eliminate the dividend paid. – keshlam Feb 12 '17 at 18:30

(I live in the UK and along with my wife we both drive Volkswagen cars.)

A few factors:

  • Before the scandal went public, VW was seen as being one of the “greener” car companies due to their cars getting better MPG. It is not any more.
  • VW is widely acknowledged as having some of the best diesel car engines. -Now lot of people are questioning if diesel car will be outlawed.

  • VM management has just said they don’t know what their workers are doing!

  • The USA has made it clear they will create pollution law in a way that benefit their own car makers. (E.g. they don’t care about CO2.)

  • If not diesel cars, then it needs hybrid or electric cars to get good MPG – VM is not seen as a leader in these.

  • Hybrid cars tend to be gas as diesel engines cost too much.

  • Electric cars don’t have engines.
  • VM has a large investment in factories making diesel engines, these factories may soon be worthless.

VW is no longer looking like a nice safe investment! I think VW will recover, but it may get worse for them before it gets better - trying to call the bottom of a stock is high risk.

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The primary reason a scandal like this hurts the company is the "bottom line." Any legal action means defense costs. In this case the potential of massive fines became reality. And a buyback program.

So, if any publicly traded company stacked up $10B in assets, doused it in diesel and set it on fire, their stock would take a dip too.

Billions in revenue directed to the expense side of the ledger instead of the profit side. That money should have gone to building the company and dividends.

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