Content-Type: text/html Do Sport Sponsorship Announcements Influence Firm Stock Prices? The Wall Street Journal Effect. Lance Kinney, Ph.D. Assistant Professor Advertising and Public Relations University of Alabama Tuscaloosa, AL, USA Gregg Bell Financial Data Specialist College of Business Administration University of Alabama Tuscaloosa, AL, USA Please direct correspondence to: Lance Kinney, Ph.D. Assistant Professor Advertising and Public Relations Box 870172 University of Alabama Tuscaloosa, AL USA 35487-0172 (205) 348-7706 FAX: (205) 348-2401 [log in to unmask] Do Sport Sponsorship Announcements Influence Firm Stock Prices? The Wall Street Journal Effect. Abstract Event sponsorship is among the fastest growing areas of marketing communication. Sponsorship funds exceeded the 2001 expenditures for cable television, syndicated television, national newspaper, outdoor, national spot radio, Sunday magazines and network radio combined. However, measuring the value of sports sponsorship is a consistent problem for event producers and event sponsors. Event study methodology allows event and sponsoring brand managers to assess the impact of sports sponsorship announcements on financial markets. In this research, 61 sports event sponsorship announcements were located in the Wall Street Journal using the Dow Jones Interactive database. Stock prices for each sponsoring firm were retrieved from the CRSP database at the University of Chicago. Stock prices for sponsoring firms were compared to the overall market. While no general sponsorship effect is observed, a significant increase in firm stock price is noted for firms sponsoring the Olympic Games and baseball events. Significantly positive results are also observed for announcements reporting the rights fees paid for the sponsorship. Contrary to previous research, a significant effect is noted for non-functionally congruent brand/event pairings. Introduction The proliferation of sports event sponsorship opportunities, the amount of money flowing from marketers to event sponsorship and the development of a body of academic literature dedicated to cataloging various sports sponsorship objectives, strategies, tactics and effects attests to its acceptance by marketers as a viable integrated marketing communication strategy (Cornwell and Maignan 1998). Originally considered unusual or innovative, sports sponsorship may now be as common as more traditional marketing communication strategies as burgeoning sports leagues compete with established leagues for sponsor funds. Overlapping football, basketball, baseball and hockey seasons in the United States provided 200 professional sports events during October 2000 (Petrecca 2000). Sports saturation has resulted in declining television ratings, yet sports sponsorship spending continues to rise. However, some prominent sponsors are beginning to back away from sponsorship; IBM announced its long affiliation with the Olympics would end with the 2000 Summer Olympic Games in Sydney, Australia (Elkin 2000). Even marketing behemoth Coca-Cola is questioning the value of sports sponsorship relative to its escalating costs (Fatsis 1998). A variety of consumer-oriented objectives are often associated with sports event sponsorship, including increasing brand awareness and brand image, as well as the ability to use promotional tie-ins and sampling at sports events (Cunningham and Taylor 1995; Levin 1993; Nicholls, Roslow and Laskey 1994; Schreiber 1994; Shanklin and Kuzma 1992). By carefully selecting events to sponsor, marketers gain exposure to difficult to reach target markets and demonstrate a commitment to supporting the target's lifestyle and interests (Jensen 1994; Schreiber 1994). In addition to consumer objectives, Sandler and Shani (1993) note that other objectives can be served, including corporate image building or media exposure. Internally, event sponsorships may be used to instill pride in the organization's work force and motivate staff (Grimes and Meenaghan 1998). A technique often used to assess event sponsorship success is to compare the exposure generated by the event association with the cost of purchasing similar levels of advertising time or space. For example, if a sponsorship requiring a $1 million commitment produced the equivalent of $5 million of advertising exposure, the sponsorship may be considered a success, depending upon the sponsor's objective. Many of these objectives are long-term, intervening variables objectives that offer little immediate justification for the expenses of incurring the sponsorship and the subsequent expenditures required to support the sponsorship investment (Crimmins and Horn 1996). Also, these objectives are removed from sales measures. The development of more sophisticated, quantitative evaluation techniques is the primary challenge facing marketers wishing to sponsor events (Freidman 1999). Meenaghan (1999) also notes that corporate sponsors will be looking for more tangible proof of delivered value, if sponsorship is to sustain its rapid growth. Event study methodology (ESM) offers sponsors a more immediate, alternative assessment of a sponsorship's perceived value to the investment community. In the following sections, a formal definition of sports sponsorship is offered, along with a brief review of ESM and its appropriateness for marketing communication strategy research. A pool of sports sponsorship announcements is gathered and ESM is applied to assess the perceived value of sports sponsorship. Results are presented and discussed, along with recommendations for future sponsorship research. Review of Literature Sports Sponsorship Sports sponsorship, sometimes known as event marketing, may be defined as "a cash or in-kind fee paid to a property in return for access to the exploitable commercial potential associated with that property" (Ukman p. 1, 1995). Recent estimates note the phenomenal growth of event sponsorship as a marketing communication strategy. Expenditures across all types of events, including sports, cultural and other types of events, were estimated at $23.6 billion for 2002, a 3% increase over 2001 spending levels. The majority of this spending, 67 percent, is allocated to sports events (www.sponsorship.com). This staggering figure illustrates why event sponsorship is one of the fastest growing areas of marketing communication. According to Advertising Age, sponsorship funds exceed the 2001 expenditures for cable television, syndicated television, national newspaper, outdoor, national spot radio, Sunday magazines and network radio combined (U.S. ad spending totals 2002). Event Study Methodology Event study methodology (ESM) offers sponsoring marketers from publicly traded firms an opportunity to move beyond consumer-based, indirect intervening variables effectiveness assessment. A more immediate indicator of the perceived value of the sponsorship could be observed in the firm's stock price as traded on any number of stock exchanges. As noted by Lane and Jacobson (1995, p. 67) ESM is believed to provide an unbiased estimate "of future long-term earnings." Excess stock return measures the difference between the actual return and the expected return if the event had not occurred. ESM assumes a theory of efficient capital markets based on public information exchange (Fama et al. 1969). At any point in time, a publicly traded company's stock value reflects the trading public's perception of all available information about the firm. This perceived value is made tangible in the firm's stock price. New information is quickly disseminated and acted upon by the investment community. If information is released that investors think bodes well for a firm's future, capital will rush to the firm, thereby increasing the firm's stock value. Conversely, information perceived as negative may result in selling activity, perhaps devaluing or destabilizing the firm. Of course, information could be perceived as inconsequential and produce no significant change in the firm's stock price. ESM research entails isolating the date of the information release, then examining stock prices adjacent to this time period. The excess value created by significantly positive information is called the cumulative abnormal return, or CAR (Agrawal and Kamakura 1995). ESM, Marketing and Advertising ESM has been used to assess the impact of marketing and advertising information. Horsky and Swyngedouw (1987) report that company name changes produce significantly positive abnormal returns. They theorize that name changes signal to potential investors that important changes loom that should result in profitable returns. Chaney, Devinney and Winer (1991) report significant abnormal returns associated with new product introduction announcements for technical firms, most notably for introductions of genuine innovations, as compared to brand extensions and repositioning of existing brands. Bobinski and Ramirez (1994) review the influence of investor relations advertising appearing in the Wall Street Journal. Overall results are inconclusive, but significant effects are noted for small cap firms, suggesting the new visibility generated by advertising might pique the interest of investors who were previously unaware of the firm. Agrawal and Kamakura (1995) note significant abnormal returns associated with announcements of celebrity endorsement contracts. They write, "... results clearly indicate a positive impact of celebrity endorsements on expected future profits, which lends objective, market level support to the use of celebrities in advertising" (p. 60). The value of the celebrity is most clearly observed in Mathur, Mathur and Rangan's (1997) ESM analysis of Michael Jordan's return to professional basketball following his foray into minor league baseball. Jordan's announcement alone was enough to add value to firms benefiting from his endorsement. Mathur and Mathur (1995) investigate advertising slogan change announcements for 87 firms. Significant effects are observed within 10 days of the announcement. Their analysis suggests slogan changes increased firm value from $6 - $8 million. Mathur and Mathur (1996) also note significant wealth effects associated with the announcement of some types of alliances between clients and ad agencies, as do Rutherford, Thompson and Stone (1992). Consolidation, new business activities, agency prestige and account size seem to impact publicly traded ad agency stock prices. ESM and Sports Sponsorship The authors of this research are aware of at least two other academic research inquiries into the relationship between sports sponsorship and stock prices. Mathur and Mathur (1997) investigated the impact of Michael Jordan's announcement as a result of his celebrity, rather than his sporting activities, however, it seems difficult to separate one from the other. Similarly, Agrawal and Kamakura (1995) also note that many of the endorsements they review are for sports apparel endorsed by athletes, however, their research is not sports specific. Cornwell, Pruitt and Van Ness (2001A) use ESM to investigate the impact of winning a high profile automobile race on the winning racing team's publicly traded sponsor partners. They note that several controllable and uncontrollable variables impact stock price, especially brand/event congruency. Sponsoring brands functionally congruent with auto racing, such as motor oil and gasoline additives, may derive significantly more benefit than functionally incongruent sponsor brands. Miyazaki and Morgan (2001) investigated brands sponsoring the 1996 Summer Olympic Games in Atlanta, Georgia. While they note significant impact for some sponsors, they do not find an overall general effect. They conclude that their non-significant findings may indicate that the investment community thinks sponsorships are appropriately valued, acceptable activities that should enhance long-term corporate objectives. Similarly, Hilsenrath (1996) reports no significant stock impact during the Atlanta Games. Hilsenrath did not use ESM to investigate stock prices, nor was this research reported in a peer-reviewed, academic journal. Research Questions Our objective is to analyze the broadest array of sports sponsorship announcements possible, rather than specific sports events. A review of extant literature did not produce a review of general sports sponsorship and stock prices, so the research of Agrawal and Kamakura (1995) regarding celebrity-based advertising was adopted as the model for the research reported here. As a start, the following research question is addressed: RQ1: Does the announcement of a firm's intention to sponsor a sports event increase the stock value of publicly traded companies? While other ESM research has been published examining an auto race (Cornwell, Pruitt and Van Ness 2001A) and the Atlanta Olympic Games (Miyazaki and Morgan, 2001), the research reported here considers the possibility that investors might respond more favorably to sponsoring some sports as opposed to others. Since companies listed on American stock exchanges are used for this research, there may be a bias toward sports more popular in America, especially American-style football, baseball and basketball, suggesting the following research question: RQ2: Are some sports perceived by investors to be better sponsorship opportunities? The next research question concerns the amount of information in the coverage of the event's announcement. Investors may be able to more accurately assess the sponsorship's potential if the announcement describes the brand's plan for leveraging the event (Mathur and Mathur 1996). RQ 3: Does the length of the sports sponsorship announcement significantly impact the stock price of publicly traded firms? A last research question is considered as suggested by Cornwell, Pruitt and Van Ness (2001A). They note that functionally congruent sponsor brands benefited from pairing with a winning auto racing team. RQ 4: Are functionally congruent brand/event pairings more likely to be favored by potential investors? The implied hypothesis of financial ESM is that the CAR of the company linked to the event is significantly different from zero. Null and research hypotheses for each research question investigated here can be expressed as Ho: CAR = 0 and Ha: CAR ? 0. A statistically significant result is observed at p < .05. Method The Dow Jones Interactive (DJI) Business Newstand database was used to locate sports sponsorship announcements published in The Wall Street Journal. This on-line database covers the 50 largest circulation United States newspapers, as well as business and financial press wires. A database search of The Wall Street Journal is often used to locate information for ESM research (Bobinski & Ramirez, 1994; Chaney, Devinney and Winer 1991; Mathur and Mathur 1996). The database was searched using the keyword "sponsorship" in combination with the following terms: "football," "baseball," "tennis," "auto racing," "soccer," "Olympics" and "hockey." An "other" category was included to account for sports events that were observed infrequently, such as yacht and horse racing. These search terms yielded 69 sponsorship announcements in The Wall Street Journal. The event study date is defined as the date of newspaper publication. In the case of announcements appearing over several days, the earliest announcement date is used as the event study date. Multiple references to a single sponsorship were excluded assuring that each announcement is examined only once. During the initial search phase, all announcements located in the database were recorded. Private firms were identified and excluded later. Only publicly traded firms' sponsorship announcements are examined here. In addition to the announcement date and event/brand sponsor partners, each announcement was coded for sport type and total word count. Stock price data were located using the Center for Research in Security Prices (CRSP) database at the University of Chicago. The CRSP database contains stock prices for the Dow Jones, AMEX and NASDAQ stock exchanges. Observed event date stock prices were compared to the CRSP value-weighted portfolio of NYSE and AMEX stocks, then regressed on and compared to the value-weighted portfolio. Excess return is calculated as the actual return minus the market model expected return (Lane and Jacobson, 1995). A full ESM statistical review is beyond the scope of this report. For more detail, the reader is referred to Lane and Jacobson (1995), and Brown and Warner (1985; 1980). At the time of this analysis, stock prices were available through the end of the 2001 calendar year. Results For all analyses reported here, stock prices were obtained for the 255 days prior to the actual event announcement for the sponsoring firms. (This is one trading year. By using exactly one year, we eliminate seasonality and month effects from the data.) ESM regressions were conducted for the event announcement date (denoted as day 0), and the five days prior to and subsequent to the event date. Announcing firms' stock prices were compared to the CRSP value-weighted portfolio as a statistical test for significant differences. Excluding all announcements for private firms, multiple announcements for publicly traded firms and firms for which complete data were not available yielded 61 unique events for analysis. The number of announcements by sport are detailed in Table 1. ---------- Insert Table 1 about here. ---------- RQ 1 addressed the possibility of a statistically significant general effect for sports sponsorship announcement similar to the celebrity effect noted by Agrawal and Kamakura (1995). There appears to be no significant general sports sponsorship announcement effect for the announcements analyzed here. As suggested earlier, RQ 2, there is the possibility that investors with funds in U.S. stock exchanges could prefer sponsorships for some sports, therefore, each announcement was coded for sport type and separate ESM analyses were conducted for each sport, including the catch-all "other" category. It appears that investors do respond positively to baseball and Olympics sponsorships. No significant effects were observed for auto racing, basketball, hockey, golf or other. A negative effect indicating stock price decline is observed for American-style football and tennis, however, the declines do not approach conventional levels of statistical significance. A significant decline is noted for soccer sponsorship announcements on the fifth day after the event (CAR = -3.63%, Standardized CAR = 18.36%, p < .05). Results for positive significant abnormal returns sports can be reviewed in Table 2. ---------- Insert Table 2 about here. ---------- Early in the coding we realized word count was an invalid method for assessing the information content of the sponsorship announcement. Many announcements were included as brief lines in longer articles devoted to business or marketing news. While the DJI Interactive News Service does report word count for each article returned in the search, very few of those words might be devoted to sponsorship announcement coverage. We decided to use reported sponsorship rights fees as a proxy for information. The information variable was dummy coded as 0 or 1 for regression analysis. Of the 61 sports sponsorship announcements analyzed here, 36 included an estimate of sponsorship rights fees. A significant positive effect is noted for sponsorship announcements reporting these costs. Daily results are detailed in Table 3. ---------- Insert Table 3 about here ---------- As suggested by Cornwell, Pruitt and Van Ness (2001A), brand/event associations were investigated for functional congruency. This concept suggests that the brand may somehow be used in or enhance the performance of the sport being sponsored. We identified seven functionally congruent pairings: Powerade sports drink and the National Hockey League, Powerade sports drink and the Women's National Basketball Association, Nike and the National Football League, Nike and Major League Soccer, Reebok and the Olympics, Reebok and the National Basketball Association, and Sara Lee-Sanex (sports apparel) and the women's Professional Tennis Association. Contrary to Cornwell, Pruitt and Van Ness, we observed significant results for the 54 non-functionally congruent brand pairings. Results for this analysis are detailed in Table 4. ---------- Insert Table 4 about here ---------- Discussion As with any research, a number of limitations must be considered. This research's focus upon general sports event sponsorship ignores specific sports event sponsorship opportunities, with the exception of the Olympics. Similar research questions for specific events or other types of sponsored events might produce different results. ESM has a number of method-specific limitations. This method is only applicable to publicly traded firms. Information leaked prior to the announcement date can diminish the impact of the formal, public announcement. There is also the possibility of other "noise" affecting stock prices, such as general market fluctuation based on consumer confidence, although theoretically the ESM analytical technique should account for this. However, a sponsor brand could be a subsidiary of a larger firm. The sponsorship announcement could be deemed insignificant or overwhelmed by information from other corporate partners. The method used to locate announcements could impact results. The DJI Newsstand will not contain sponsorships that were never announced. Perhaps some sponsorships did return significant stock price value despite no formal, public announcement or without being covered by The Wall Street Journal. While ESM research has uncovered significant findings for other marketing communication activities, no significant general effects were observed for the sports sponsorship announcements analyzed here. There may be several explanations for this. In the case of sports sponsorship announcements, there is often a long delay between the sponsorship announcement and the actual event. In fact, years may pass between announcement and competition. A lengthy time lag between the announcement and event could make it difficult for potential investors to determine if the sponsorship is a sound, profit-building strategy. Initial non-significant effects could mean that investors don't expect a significant return on investment until the time of the event. Non-significant effects could also mean that the investment community thinks the sponsorship is appropriately priced for the value delivered, as suggested by Miyazaki and Morgan (2001). If so, the firm's stock price should be stable. There is also the possibility that sports sponsorship strategies have become so common as to be accepted as a standard integrated marketing communication activity. If sponsorship is not perceived as novel, then the firm's stock price should not be impacted. Similarly, sponsorship announcements may not be dramatic enough to capture an investor's attention. In other words, a sports sponsorship announcement is not likely to be perceived as bad news, and it may not be viewed as positive enough to impact perceptions about a firm's profit potential. An interesting condition is reported by Mathur and Mathur (1996) that might help interpret these sports sponsorship results. They note that the information content of the announcement appears to make a significant difference, with more informative announcements demonstrating more positive impact. The impact of information was considered as an important variable for the sports announcements investigated here. Initially, sponsorship announcements were observed for word length. We abandoned this variable as invalid, opting instead for some mention of the sponsorship rights fee. Firms reporting expenditures did see a significant increase in stock price. When fees were not included in the announcement, we often noted a disclaimer such as "financial terms were not disclosed." Generally, sponsorship announcements did not warrant lengthy editorial treatment and were frequently observed as brief components of general business articles. This suggests the possibility that investors could better evaluate the profit potential of sports sponsorships if more detail was reported in the announcement. Investors might respond more positively if the announcement included some information about how the sponsorship enhances the firm's marketing communication activities. Firms that are frequent sponsors might even delay announcing a sponsorship until the firm is ready to announce a number of sponsorships at once. This might attract enough attention from media to warrant fuller coverage, thereby alerting the investment community of increased earnings potential. However, each brand must consider the impact of too much disclosure and how competitors could use the information to derail sponsorship-based marketing objectives. This research also reveals contradictory findings about the perceived value of Olympics sponsorship (Miyazaki and Morgan 2001) and functionally congruent brand/event pairings (Cornwell, Pruitt and Van Ness 2001A). We suggest these contradictions are based on our general review relative to the specific reviews of previous research. For example, Miyazaki and Morgan investigated brands associated with the Atlanta Olympic Games. Their results for this specific event may well be valid and accurate. Cornwell, Pruitt and Van Ness also review the results of brands associated with a specific race. Investors in their research would be responding to a specific, observed event outcome, rather than speculating on what the outcome might be. Also, they place a number of conditions on their auto race findings. Future Research Areas There remain several sponsorship questions that ESM could address, especially in terms of specific events. ESM applied to specific sports events, rather than the generic sports sponsorship strategy, might produce different results. While tennis as a general sports category does not appear to produce significant value, sponsoring Wimbledon might. As noted earlier, Cornwell, Pruitt and Van Ness did (2001A) report significant effects as a result of winning a specific auto race, but only under very limited conditions. Similarly, the research reported here does note a significant effect for Olympics sponsors. Of course, sports events aren't the only events a firm can sponsor. Sponsorships are available for arts and civic groups, music tours, festivals, etc. Sponsoring other types of events might produce significant effects. Lastly, the functional congruence concept noted by Cornwell et al. (2001A) and addressed here does not consider image-based congruence (Gwinner and Eaton 1999; Gwinner 1994) Readers are encouraged not to interpret any non-significant results as diminishing the value of sports sponsorship generally or the value of sponsoring a specific sport or event. Instead, these results may best be interpreted as suggesting that sports sponsorship is undertaken as a single component of long-term, brand equity building integrated marketing communication strategies. Cornwell at al. (2001B) note that active managers do expect immediate financial value from sports sponsorship and integrate other strategies and tactics to support the sponsorship. 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Table 1 Sponsorship Announcements for Each Sport Type Sport Number of Announcements Olympic Games 16 Football 10 Soccer 8 Basketball 7 Other* 7 Baseball 4 Auto racing 3 Hockey 3 Tennis 2 Golf 1 Auto racing 7 TOTAL 61 * This category includes announcements for sports observed infrequently, such as track and field events, or bicycle, horse and yacht racing. Table 2 Abnormal Returns for Positively Statistically Significant Sport Sponsorship Announcements Baseball Cumulative Standardized Abnormal Abnormal Window Return Return -5, 0 2.66% 1.510 -4,0 3.13% 1.949 -3,0 3.38% 2.354 -2, 0 2.87% 2.308 -1, 0 3.29% 3.236 -1, +1 4.24% 3.409*** -1, +2 4.20% 2.921** -1, +3 3.09% 1.927* -1, +4 3.40% 1.936* -1, +5 3.29% 1.730* *** p < .001 ** p < .01 * p < .05 Table 2 (continued) Abnormal Returns for Positively Statistically Significant Sport Sponsorship Announcements Olympics Cumulative Standardized Abnormal Abnormal Window Return Return -5, 0 1.57% 1.689 -4,0 1.54% 1.822 -3,0 1.47% 1.945 -2, 0 1.66% 2.524 -1, 0 .85% 1.582 -1, +1 .96% 1.471 -1, +2 1.39% 1.840* -1, +3 2.10% 2.485** -1, +4 2.04% 2.203* -1, +5 2.16% 2.153* ** p < .01 * p < .05 Table 3 Abnormal Returns for Reported Announcements with Expenditures1 Cumulative Standardized Abnormal Abnormal Window Return Return -5, 0 .71% 1.003 -4,0 .94% 1.455 -3,0 .76% 1.310 -2, 0 .55% 1.100 -1, 0 .60% 1.463 -1, +1 .94% 1.871* -1, +2 .86% 1.478 -1, +3 .70% 1.073 -1, +4 .62% .868 -1, +5 .28% .370 * p < .05 1 36 of 61 announcements included some reference to the sponsorship fee. Table 4 Abnormal Returns for Functionally Incongruent Brand/Sponsor Announcements1 Cumulative Standardized Abnormal Abnormal Window Return Return -5, 0 .59% 1.040 -4,0 .75% 1.434 -3,0 .51% 1.091 -2, 0 .42% 1.048 -1, 0 .32% .976 -1, +1 .68% 1.683* -1, +2 .77% 1.663* -1, +3 .69% 1.331 -1, +4 .49% . 856 -1, +5 -.01% -.015 * p < .05 1 54 of 61 announcements were deemed to be functionally incongruent pairings.