Volkswagen Admits Cheating — And Was Punished!

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What's going on?

Volkswagen stock sold off an astounding 20% amid allegations that it knowingly cheated in US car pollution tests meaning it potentially purposely misled the US regulator.

What does this mean?

Volkswagen admitted that they installed a device on its diesel cars that showed testers a much lower emissions level than it really emittedwhile on the road. The reputational damage to Volkswagen is potentially huge. Explicit costs to Volkswagen in fines and lawsuits could be in the billions of dollars. Shares of other car manufacturers, like Renault and Peugeot, fell about 5% as investors feared that Volkswagen might not be the only guilty company although there is no explicit suggestion of wrongdoing by other companies.

Why should I care?

  1. Until the market has a much better idea of the costs to Volkswagen, it will be difficult for the stock to recover. The longer-term reputational damage will also be difficult to quantify. Investors tend to sell first and ask questions later in times of crisis however this could quite possibly lead to the stock becoming oversold, and thus creating a good buying opportunity eventually.
  2. The implications for the rest of the automobile sector could be severe. US pollution tests are notoriously easy to circumvent, and its certainly possible (perhaps even likely) that other companies have performed similar tricks.
Originally posted as part of the Finimize daily email.

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