The Effect of Automotive Industry Scandals on Shareholder Wealth: A Supply Chain Perspective

The automotive industry has been marred by numerous high-profile scandals in recent decades. Inasmuch as the automotive industry is characterized by strong relationships between manufacturers and suppliers, a scandal’s adverse effects may spread through the supply chain. However, the effect of corporate scandals on supplier firms has received little attention in the literature, with previous studies focusing on individual scandals. To address this issue, we investigate twelve major scandals (events) and 1,232 firm-event observations and find that both the scandal firms and dependent suppliers experience a significant decrease in shareholder wealth after the scandal becomes public. We also find that the market reaction to the event for suppliers varies according to the degree of the supplier’s dependence on the focal firm. In addition, we present evidence for a number of operating variables of supplier firms, indicating that the most dependent firms are adversely affected by major scandals. Our results lend credence to the propositions that behaving in a socially responsible fashion is congruent with corporate self-interest and that the effects of corporate misbehavior are not limited to the firms directly involved.