Study On Continued Growth Of Sponsorship Expenditures Finance Essay
Research by IEG (2008) reported continued growth of sponsorship expenditures worldwide. The emphasis of sponsorship as an element of the marketing communications mix is growing as a result of both increases in the number of sponsoring companies and the total amount spent on sponsoring (Javalgi, Traylor, Gross et al,1994; Meenaghan, 1991). Recent literature also found a growth trend in sponsorship over traditional advertising that began in 1990 (Cornwell, 2008). Ha (1996) mentioned that marketers are finding it more difficult to differentiate products and services through traditional media like advertising which is characterized by considerable clutter, consequently sponsorship agreements in sports are emerging as a promotional tool to reach target markets (Gardner an Schuman, 1988).
While sponsorship in general over the last decades seem to have gotten more popular as a marketing tool, sponsorship in the sports industry looks to have outgrown sponsorships in other industries. Depending on the year being studied, the country and the definitions, the share of sports sponsorship within the sponsorship as a whole, lies approximately between 50 and 70 % of the total (boek!!).
On most continents football can be stated as the most popular sport in the world (Gutmann & Dunning,???). Some exceptions include North America, in which baseball, ice hockey, and American football get more support and parts of Asia, where cricket is very popular (>>>>).
Worldwide, millions of people regularly go to football stadiums to follow their favorite teams, while billions of people watch the game of football on television. The best and most popular leagues, including; The Premier League (England), The Serie A (Italy), The Bundesliga (Germany), and The Primera Division (Spain), are broadcasted worldwide.
With billions of potential watchers, television stations are prepared to pay enormous amounts of money for the broadcasting rights of either of these leagues. Satellite Television Network “Sky” paid £1.314 billion for the broadcasting rights of The Premier League for the period of 2007 to 2010(…).
Because football gets extensive media coverage, sponsorship agreements with football clubs are an interesting tool for corporations to promote their brands and products to a wide audience.
Corporate sponsorships in the football industry, along with the growth of media coverage, have made a considerable development over the last decades. Corporate names can be found on billboards, as official stadium sponsor, as official league sponsor and as official shirt sponsor. Corporations are willing to associate their brand names with the football industry by dedicating to million dollar sponsorship agreements. In 2005 Samsung committed to a 81 million dollar 5-year sponsorship agreement to become Chelsea’s official shirt sponsor(…).
Given the fact that these sponsorship agreements in the football industry are significant investments for corporations and sponsorship expenses seem to rise over time, these considerable large investments raise the question how effective these investments really are. Do these investments provide an adequate return?
IEG (2000) defines sponsorship as “a cash and/or in kind fee paid to property (typically a sports, entertainment, non-profit event or organization) in return to access to the exploitable commercial associated with that property.
Development of goodwill, corporate/brand image, corporate/brand awareness, increased sales and to establish community relationships and support the community are suggested by Cornwell and Maignan (1998) as the main objectives of sponsorships. Latter research by Roy and Cornwell (1999), found; breaking free from traditional media clutter ,reaching specific target markets, positioning the brand, enhancing media coverage and building client relationships, as additional objectives for corporate sponsorships.
While these objectives and the costs associated with sponsorships are clear, researchers have underscored the need to study effectiveness issues (Sandler and Shani, 1989, Thwaites, 1995, Whitcher et al. 1991)
Although several empirical studies have tried to develop and improve the measurement of sponsorship value and effectiveness, Cornwell (1995) has recognized these typical measurements as problematic. Sponsoring corporations often measure their sponsorship effectiveness by either sales figures or consumer awareness surveys (Thomas, 1996), however attempts to value sponsorship through typical awareness measures will always be fraught with difficulties (Johar & Pham, 1999, Javalgi, Traylor, Gross et al, 1994).
In view of the limited amount of research devoted to determine sponsorship efficiency and the related problems found with respect to the different measurement methods, this study focuses on the value of corporate shirt sponsorship in the football industry by looking at the stock market reaction to corporate sponsorship announcements. This research also builds on the findings of Sandler & Shani (1989) who note that “ In view of the limited efforts on one hand and the growing amount of resources devoted to sponsorship on the other hand, much more research is required to determine the value and effectiveness of sponsorship” (p.9).
In practice, corporate sponsorships are considerable marketing investments for corporations. The increasing costs associated with these investment brings into question the underlying value of these investments. Are such sponsorship investments positive corporate projects net of all costs associated with the investments?
Different studies have investigated this question for celebrity endorsement, stadium sponsorships, “official product”-sponsorships, event sponsorships and NASCAR sponsorships by looking at the stock market reaction to the announcement of the sponsorship agreement(>>>>>>>>).
However, little is known about the effect of corporate shirt sponsorships in the football industry. This is the first study that questions the value of corporate shirt sponsorships in the football industry by focusing on shareholder wealth upon the announcements of the shirt sponsorship agreements. To see whether shirt sponsorships are efficient investments, I will investigate the following research question :
How does the stock market value corporate shirt sponsorships in the football industry?
With football unquestionably being the most popular sports in Europe and in most parts of the world and a global sport sponsorship expense in 2009 of $ 45,9 billion (IEG, 2009), this is an interesting area for research. The answer to the research question is of particular relevance to marketing consultants, corporate executives, shareholders and other constituencies involved in marketing investment decision making. Furthermore, most of the existing literature on sponsorship have used United States data. Thus, their results may only reflect characteristics of US firms and markets.
Increasingly more firms include a commitment to the ultimate financial goal of maximizing shareholder wealth in their missions statements (Burton, 1996) and the importance of shareholder value maximization is also recognized by marketing decision makers (advertising spending and market capitalization)This shareholder value maximization advocates that a corporation should act in the best interests of their shareholders and builds on the financial theories that posits that managers are compelled by capital market forces to make investment aimed at maximizing firm value (Fama & Jensen, 1985; Rappaport, 1986; Reinmann, 1987) Thus, every investment decision made should be viewed in the context of shareholder returns. The true long-run value of an investment decision is whether it creates economic value for shareholders as measured by abnormal stock returns (Rappaport, 1986). Under the assumption of shareholder wealth maximization average announcement-day abnormal stock returns should be non negative
Hypothesis 1: Announcements of corporate shirt sponsorships in the football industry are positively associated with abnormal stock market returns.
In addition to the central hypothesis above, this study will also examine the impact of firm and sponsorship-specific variables on the stock market reactions registered around the time of the sponsorship announcements to analyze the cross-sectional variation of any abnormal returns.
Several interesting relations will be mentioned below from which the additional hypotheses will be derived.
Jensen and Meckling (1976) and latter marketing literature by Crimmens and Horn (1996) and Clark et al. (2002) find that agency conflicts exists whenever non-owner managers place their own welfare and preferences above the desires of shareholders in any decision involving investments of corporate assets. Obviously sponsoring a football club carries significant potential for managers to follow his own interests (e.g. being a fanatic supporter of the club, free match-tickets, etc.). at virtually no costs to themselves. The existence of an agency-related motive that drives a manager’s investment decisions can not be dismissed beforehand.
The effectiveness of shareholder monitoring of corporate expenses declines with the increase of corporate cash flows (Weston et al. 2002). So, the likelihood of an agency-related motive for sponsorship agreements increases with a higher level of free corporate cashflows;
Hypothesis 2: The abnormal stock market returns related to corporate shirt sponsorship announcement will be negatively associated with cash flow.
Capital expenditures are, on average, associated with positive announcement returns (Woolridge, 1988). This market reaction on capital expenditures is found to be related to a firm’s investment opportunities (Muscarella, 1985; How & Vogt 1996). Chen & Ho (1997) extended these findings and show that capital expenditure announcements of firms with good investment opportunities are positively valued by the market, while capital expenditure announcement of firms with poor investment opportunities are not. Based on this result, and considering marketing expenditures as capital expenditure, the following hypothesis will be tested;
Hypothesis 3: The abnormal stock market returns related to corporate shirt sponsorship announcement will be positively associated with investment opportunities
To test the effects of differences in corporate scale on sponsorships the influence of the market value of equity will be examined. Ceteris paribus, for any fixed level of sponsorship net present value, its percentage value to the firm, measured in abnormal returns calculations, must decline as firm size increases. This relation is based on the findings of Clark et al. (2002) and Cornwell et al. (2001), who found that the shareholder wealth effects of Nascar and corporate stadium sponsorship announcement and the market value of the sponsoring firm are negatively correlated. The following hypothesis is ground on their results;
Hypothesis 4: The abnormal stock market returns related to corporate shirt sponsorship announcement will be negatively associated with the market value of the sponsoring firm.
To see whether the stock market reaction is driven by past profitability of the sponsoring corporation, the next hypothesis that will be tested is in line with earlier work by Mishra et al. (1997) who found that corporate event sponsorship announcement of firms that have been more profitable in the past are greeted more positively by the market.
Hypothesis 5: The abnormal stock market returns related to corporate shirt sponsorship announcement will be positively associated with the past profitability of the sponsoring firm.
High tech firm signal via sponsorship agreements that they are substantial and strong and therefore are positively associated with the abnormal returns of title event sponsorships, corporate stadium sponsorships, and “official“ products sponsorships (Clark et al, 2002; Cornwell et al. 2005:>>>>>>) Clark et al. (2002) mention that signaling is particularly important to high tech firms that may seem amorphous in contrast to brick and mortar firms. I expect the corporate shirt sponsor announcements of firms in the computer, internet, and telecommunications industries, to be positively criticized by market participants;
Hypothesis 6: The abnormal stock market returns related to corporate shirt sponsorship announcement will be positively with designation as a high tech firm.
Literature by Hector (1988) argued that managers can develop long-run strategies for their corporations that will be rewarded by the stock market. Build on this literature work, Woolridge and Snow(1990) examined the stock market’s reaction to public announcements of corporate strategic investments decisions. They found a positive reaction to corporate strategic investments, indicating that the market’s valuation of these investments is, on average, positive. This finding supports the shareholder wealth maximization view. This financial theory posits that managers are compelled by capital market forces to make investment decisions aimed at maximizing firm value. Earlier studies by Fama and Jensen (1985), Rappaport (1986), and Reimann (1987) also found similar results for corporate investment decisions, including major capital expenditures and research and development projects.
To get further insight in this subject, more research was done with respect to the effect of research and development expenditures on the market value of the firm. A paper of Chauvin and Hirschey (1993), for example, provides evidence that advertising and research and development expenditures have large positive and consistent influences on the market value of the firm. This result suggests that data on research and development expenditures and advertising expenditures provides positive information to investors on which investors base their expectations of future cash flows. Advertising investments is a form of investment in intangible assets with predictable positive effects on expected future cash flow (Chauvin and Hirschey, 1993).
The growth trend of sponsorship expenditures over traditional advertising expenditures since 1990 (Cornwell, 2008), and the worldwide growth of sponsorship expenditures from US $ 2.3 billion in 1989 (Busby & Waterman, 1989) to a four-fold US $ 9.6 in 1993 (IEG Sponsorship Report, 1993) has led to an increase of literature devoted to research on the effects of sponsorships.
The main objectives of sponsorships in general, include improving goodwill, enhancing corporate/brand image, increasing brand/corporate awareness, improving profitability/sales, hospitality, and employee reactions (Cornwell and Maignan,1998). Cornwell and Roy (1999) found that breaking free from traditional media clutter was also rated highly by CEOs as a motive for corporate sponsorships.
Related to these objectives, racing sponsorships, for example, were indeed found to be positively influence consumer awareness (Arthur et al., 1998; Qester, 1997), several event sponsorships led to an enlargement of corporate image (Meenaghan, 1991), and Peters and Waterman (1982) support the positive effect of Olympic sponsorships on employee reactions. Furthermore, Mishra et al. (1997) point out the potential positive influence of sponsorship on channel member acceptance and goodwill. Sponsorships may however also have negative effects on potential agency problems and intra-organizational coordination.
While these objectives are well accepted, Cornwell (1995) point out that the measurement of sponsorship effects has been recognized as problematic for some time. Because sponsorship is a marketing related issue, most research that has been conducted to evaluate the effectiveness of sponsorship has focused on typical surveys among consumers. Most sponsoring corporations and consulting firms measure the value and effectiveness of their sponsorship activity via sales figures, consumer awareness surveys, or image surveys Thomas,1996; Arthur, Dolan and Cole,1998; Quester, 1997; Hoek, Gendall and Theed, 1999). Other methods used by marketers to evaluate sponsorship effectiveness include calculating the amount of time each sponsor is clearly visible on the television screen and/or mentioned in the verbal content of the program.(>>>) However, measuring the value of sponsorship via typical awareness methods has been recognized as problematic by Johar and Pham (1999). Likewise, Meenaghan (1991) found that the evaluation of sales figures, should be corrected for non-sponsorship influences and Cornwell (1995) and Meenaghan (1983,1991,1996) point out that the valuation method which calculates the amount of time each sponsor is visible on tv-screen, is not valid in many sponsorship contexts.
The rising costs of sponsorships, the insufficient literature on sponsorship to understand the value and effectiveness of sponsorship along with the difficulties and inadequacy found in earlier measurement methods of sponsorship value and the change on objectives of sponsoring organizations on more exploitable commercial potential and measurable results (Farelly, 1997; Wilsson,1997; Cornwell, 1995), has led to a new stream of literature that questions the economic worth of sponsorships.
This present research builds on prior research that evaluated the economic worth of different kinds of sponsorships by looking at the market’s assessment of sponsorship announcements by means of the event-study methodology, which is consistent with a forward-looking perspective of stock market investors.
Consistent with the wealth maximization view, announcements of; corporate event sponsorships, official product sponsorships, Nascar sponsorships, title event sponsorships and corporate stadium sponsorships all led to an increase in shareholder wealth of the sponsoring firm (>>>>>>>>>>>>>>>>>>).
The majority of these studies also investigated whether the abnormal returns upon the sponsorship announcement date were associated with certain firm-specific, contract or sponsorship-related characteristics. Cash flow of the sponsoring, a potential proxy for agency problems was found to have a negative impact on the abnormal returns of Nascar sponsorship announcements (Pruitt et al., 2004). The market value of equity was found to have a negative impact on the returns of corporate stadium sponsorships, indicating that any given dollar value of benefit of sponsorship by definition represent a smaller percentage of the value of larger firms and that smaller firms may be better able to capture synergistic marketing benefits (Pruitt et al. 2004). It’s worth mentioning that Clark et al. (2008) found exactly the opposite result for title event sponsorship. Cornwell et al. (2005 )discovered a positive relation between a firms past profitability and Official product sponsorships of Major League sports. Furthermore, corporations identified as high technology firms and congruence of the sponsoring firm with the sponsored entity, were both associated with a positive effect on the abnormal returns of announcements of corporate stadium sponsorships, title event sponsorships, Nascar sponsorships, and official product sponsorships of Major League sports (Pruitt et al., 2004; Cornwell et al.,2005; Clark et al., 2008; Clark et al., 2002)
Certain attributes of the sponsored entity, and in particular the “past winning percentages” of the sponsored Nascar Team and the “home team” of a sponsored stadium, seem to positively affect the abnormal returns of sponsorship announcements (Pruitt et al, 2004; Clark et. al, 2002). The same effect was noted for contract-length on stadium sponsorships (Clark et al. 2002).
The purpose of this study is to quantitatively analyze the net economic value of corporate shirt sponsorships in the football industry via an examination of the stock prices of the sponsoring companies around the time of initial sponsorship announcements.
This event-study methodology assumes that the stock market is efficient and rapidly absorbs information directly as it becomes publicly available (Fama, 1970, 1991). This approach estimates the effect of an event like shirt sponsorship announcements on a firm’s common stock value by measuring the difference between actual and expected stock returns a specific time-period surrounding the event. Via their buying and selling decisions investors make reasoned judgments about likely impacts and riskiness of corporate decisions and this way stock market returns to sponsorship announcements reflect aggregate investors expectations of the change in long-term future cash flows (profits). Under the assumption that managers are compelled by the capital market to make investment decisions aimed at maximizing firm value, corporate shirt sponsorships should be profitable investments.
By looking at stock prices, the event study methodology directly reflect changes in shareholder wealth and is free from biases of other measurement methods earlier discussed in this paper. Furthermore, future profit expectations of shareholders reflected in stock prices isolate the effects of sponsorship investments, which may not be possible for other accounting-based performance measures, such as overall profits. Similarly, Amber (2004) notes that ROI as accounting performance measure for marketing related expenses is driven by short term considerations and often fail to reflect the dynamic impact of marketing assets. By means of the event study methodology it is possible to get a investor’s unbiased assessment of the value of shirt sponsorships.
To evaluate the value of shirt sponsorships in professional football I examine abnormal returns of the sponsoring firm’s stock upon the announcements of shirt sponsorships. To calculate the abnormal returns I will make use of the Data Stream Event Study of the Erasmus University. The assumptions of the Data Stream Event Study model are based on the article of MacKinlay ( 1997). Based on this article the normal return for firm i on day t can be expressed as a linear function of the returns of a market portfolio;
= normal return for firm i, and = market portfolio.
For the estimation of the parameters (α and β) of the market model for each firm I will regress its actual returns of a weighted portfolio of securities using an estimation period of 239 days (t -244 to t -6 days, relative to the event day t=0). This estimation window was also used by Agrawal and Wagner (1995) for their research on celebrity endorsements. The statistical procedure I will use for the generation of the empirical results is know as the Ordinary Least Squares market model.
Using the market model to measure the normal return, the abnormal return is measured by;
Where ri,t is the actual return for firm i on day t, and ai and bi are the estimates of the market model parameters αi and βi respectively. I will focus on shirt sponsorships of proffesional football teams in the best football leagues in Europe; Primera Division (Spain), Premier League (England), Ligue 1 (France), Serie A (Italy) and Bundesliga (Germany). For the proxies of the market portfolios on a national level I will use the equally weighted index on the FTSE 100 (England), Xtra Dax (Germany), Lac 40 (France), Bolsa de Madrid (Spain) and Borsa Italiana S.p.A. (Italy). To capture the value creation on sponsorships on a national scale, I look at the stock exchange of the country in which the football club is based.
The worldwide broadcasting of the matches of these leagues makes it possible for corporations to get international exposure. Some of the sponsoring firms are international corporations and listed on more than one stock exchange. If the firm is also listed on a stock exchange besides the stock exchange of the country in which the football club, I will measure the stock price reactions on these markets and use the equally weighted indexes of those stock exchanges for the proxies of the market portfolios, to see how the market values the sponsorships deals outside the country in which the football club is based.
Formules bovenstaan ff bijwerken meer tekst.
To investigate the importance of a firm’s cash flow, investment opportunities, market value, past profitability and industry, I will run a multiple regression. This regression, for examination of hypotheses 2 to 6, is modelled as follows;
CAR= β0 + β1 CASH FLOW/SHARE + β2 INVESTMENT OPPORTUNITIES + β3 MARKET VALUE + β4 PAST PROFITABILITY + dummy (HIGH TECH FIRM)
Cumulative abnormal returns registered by each sponsoring firm registered over the event window t=-? And t=? will serve as dependent variable.
The independent variables and dummy were found to be important in prior sponsorship and other related research.
CASH FLOW/SHARE, caculated as corporate free cash flow per share, is found to be significantly correlated with abnormal returns of NASCAR sponsorships ( Pruitt et al. 2004). INVESTMENT OPPORTUNITIES will be caculated according to Chen and Ho (1997). The proxy often used to measure a firm’s INVESTMENT OPPORTUNITIES is a firm’s Tobin’s q (The ratio of the market to book value of a firm’s assets minus the book value of common equity plus the market value of common equity). My Q variable will be the three year average of values prior to the sponsorship announcement, which is used by Lang et al. (1991) and Chen & Ho (1997). The variable MARKET VALUE will be obtained, according to Clark et al. (2002), by multiplying the number of shares outstanding by the closing stock price on event day t= -?. The PAST PROFITABILITY of the sponsoring firm will be calculated in similar fashion with the work of Mishra et al. (1997) by computing the ratio of operating income before depreciation and taxes to total assets (ROA).
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