Economic inequality in the United States is growing and people are pissed off. For a while, this anger was channeled at Wall Street—and given the jaw-dropping profits and dubious economic benefits of recent financial "innovation" this seemed like an appropriate target. However, as financial reform advocates lost momentum in Washington, a new target has emerged that can be stymied locally and is not yet politically entrenched—the sharing economy.
Businesses have a long record of using athletes to market their products. The association between your brand and a popular athlete can induce otherwise-absent goodwill and recognition. More traditionally, a popular sporting event can attract millions of viewers, and millions of views of your brand. With annual global sporting revenues in excess of $140 billion, companies are willing to shell out big bucks for the right jock- with Nike’s $250 million, 10-year deal with golfer Rory McIlroy near the top.
I am not a fan of golf, but was nevertheless curious about the value of a golf sponsorship and how this value related to athlete performance. While most sponsorships now include ‘morality clauses’ to hedge against off-field indiscretions, I am guessing fewer have detailed performance metrics. Nevertheless, I presumed that for the sponsoring company, there is additional value in endorsing a winner (versus a runner-up, etc.). Given the typical PGA viewer demo- 27% earn $100k plus annually- I imagined that these results would manifest in the market through investor's anticipation of additional future publicity, perception of equipment performance (when applicable- i.e. Nike golf balls), and increased positive brand association for general consumers.
To explore this possibility, I looked at 44 major champions from 1997-2015 that sported visible endorsements from publicly traded companies (e.g. Nike hat or Titleist shirt). I hypothesized that, controlling for the daily fluctuation of the market, investors would- on the margin- perceive greater future value for the company from the added publicity and goodwill of the sponsored-athlete’s victory. This, I figured, would lead to these stocks beating a market index the day after a sponsored golfer’s victory, on average, over the 44 observations.
The graph below shows the trading results from a hypothetical $10,000 investment (either in a market index fund or the sponsor’s stock) the first day the exchange opens after the championship:
Overall, the stock returns were split with 22 posting gains and 22 in the red. The gains were slightly larger than the losses with an average gain of +0.13% covering all 44 stock investments.
Sadly for my thesis, the market indexes outperformed the stocks. The indexes posted gains on 28 days of trading against 16 losses, with the average index return over the 48 trading days standing at +0.28%.
Making two initial $10K investments- and allowing for the hypothetical trading of stocks/indexes without a capital gains tax- the following chart shows the results from reallocating the investment to the respective stock/index for one day after each of the 44 major championships:
On a $10,000 dollar initial investment, the stock investment would be worth $10,566 after the ‘44th day’ of trading and the index investment would be worth $11,323- or 7.1% greater.
The following chart shows the daily difference in a unique $10,000 investment for each of the 44 trading days (stock outcome – index outcome):
From this graph you can see that while the index generally outperforms the stock, the trend line indicates a shift toward the stock outperforming the index. This graph also draws attention to the large negative outlier on the 5th day of trading; an observation that represents Tiger Woods, sponsored by Nike, winning the U.S. Open on June 18, 2000. On the following day of trading, Nike’s stock dropped by 3.5% while the NYSE closed up 0.7%. This equated to a $420 dollar net difference between two $10,000 investments- more than twice as large as the next biggest loss.
Nike has had a rough start to the 21st century in its sporting endorsements; Michael Vick, Tiger Woods, and Lance Armstrong each doing irreparable harm to their personal brands- and by association Nike. Locking-up Rory McIlroy, a young and talented golfer yet to enter his prime, may be a smart long-term advertising strategy- sadly, the market didn’t seem to care much after his first major championship as a Nike-man; its stock dropped 0.5% as the market edged-up ever so slightly.
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