Research on scandal spillovers emphasizes two mechanisms: contamination, whereby negative events spread to related entities, and substitution, whereby competitors benefit from the focal firm’s losses. Both mechanisms implicitly assume that audiences perceive organizational boundaries as they formally exist. We challenge this assumption by showing that contamination follows the categorical schemes audiences actually use, which may diverge from organizational structure when ownership relationships are opaque. We develop this argument through an abductive investigation of the 2015 Dieselgate scandal. Contrary to theoretical expectations, contamination did not spread throughout Volkswagen Group. Instead, sales of German-branded vehicles declined regardless of corporate ownership, while non-German brands owned by Volkswagen posted sales gains. A difference-in-differences analysis of global automobile sales shows that German competitors without organizational ties to Volkswagen were penalized, whereas Volkswagen’s Spanish and Czech subsidiaries benefited. Survey evidence reveals the cognitive mechanism underlying this pattern: most consumers were unaware of Volkswagen’s ownership of its non-German brands but strongly associated Volkswagen with German national identity. As a result, the scandal—framed as a failure of “German engineering”—spread along national rather than organizational lines. Our findings extend categorization theory by showing that categories can function as cognitive barriers as well as conduits for stigma transfer.

ggrace2@ceibs.edu