F1 Sponsor - Stock Mkt Impact, Cobbs et al.


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Seventy-three alliances between Formula One racing teams and their affiliated corporate partners (sponsors) are analyzed via the event study methodology. Contrary to previous research restricted to the US market, the cross-sectional results of this global study indicate that the market value of firms entering into Formula One sponsorship declined as a result of the alliance announcement.

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  • Thank you… My coauthors… I am… Topic: -- commercial sponsorship in the world’s most valuable annual sport [The 18 grand prix in 2007 produced an average of US$217 million each, far greater than an average National Football League (NFL) game at US$24M, or an English Premier League (EPL) soccer match at just US$8M (Sylt and Reid 2008)]
  • research question guides this investigation… From the sponsoring firm’s perspective, does sponsoring an F1 team add value to the sponsoring firm? Once answer this question, we can ask…what factors influence value realization (or the lack thereof) in this context? ( for another day ) approach this question by … Examining commercial sponsorship within the theoretical framework of strategic alliances, which we narrow to a designation of promotional alliances. [CONTEXT, METHOD, RESULTS]
  • Many definitions of SA, …commonality: 1) interorg. Exchange of resources & 2) ongoing collaborative relationship aimed at achieving strategic (comp. adv.) objectives. [Sponshp def.] …. SA and Sponsorship developed independently … but should be brought together to reflect industry and spur further theoretical development (starting to see this shift in lit. w/ Farrelly & Quester’s work as well as Dr. Cornwell’s prolific work in the domain) [PA DEFINITION] _____________________________________________ [ONLY IF NEEDED…] How does a promotional alliance differ from a sponsorship affiliation? PA more inclusive -- but wouldn’t include all sponsorships (I.e. NOT unilateral exchanges ) PA could include advertising alliances (Samu et al., ’99 JMktg), certain joint branding relationships (Lebar et al., ’05 JAR) and licensing agreements if the relationship is structured as an ongoing, cooperative relationship, referred to by Das & Teng as a bi-lateral structure , Differ from the marketing and brand alliances? Rao and Ruekert (1994 -SloneMgtRw) -- brand alliances – tends to refer to joint branding of a new product and de-emphasizes the importance of the exchange between organizations. Bucklin & Sengupta ( ’ 93 JMktg) – co-marketing alliances -- product-based with a focus on production and distribution, which isn ’ t primary to promotional alliances.
  • If sponsorship is indeed a strategic resource, it must add value to the firm. Value is a fundamental component of any resource with strategic potential. What makes commercial sponsorship valuable? However, value alone is not enough to achieve a competitive advantage.
  • The popularity of F1 as a television spectacle is rivaled only by the NFL Super Bowl, the football World Cup finals, and the Olympic Games , the last two of which occur only every four years . Races occur in Malaysia, Bahrain , Singapore, Germany, the UK, Turkey, Australia, China, Montreal. Teams represent nations as diverse as Japan, India, Germany, Austria, England, and Italy. Drivers come from France, Japan, Australia, Scotland, Brazil and Finland. …… WITH THIS MAGNITUDE OF MEDIA ATTENTION AND GLOBAL CONSUMER POPULARITY COMES …. Corporate involvement : Marlboro $100M (even without name on car)
  • Ferrari with and without Marlboro branding. [Altria group, owns Phillip Morris, decided not to run Marlboro branding at any race in ’09] Not necessarily directly relevant to what we’re investigating here, but shows the assumed power of branding building in the F1 context. Also visible on the car: Shell, AMD, Alice, Acer, Bridgestone
  • Must be unanticipated event with verifiable announcement date. Hypothesis : YES, sponsorship announcements create an expectation of future cash flows – even in the case of expensive sponsorship investments (stadium naming rights) Sample – Alliances ongoing in 2007 - announcement dates different from each alliances Are abnormal returns present and significantly different from zero in a cross-sectional analysis of the sample?
  • 2 modeling approaches Market Model (Fama, 1970) – 2 steps 1 st step - Estimation window -250 to -50 to calculate alpha and beta parameters for each firm’s stock. Step 2: Insert parameters in model and estimate returns in event window. (4-factor model gain recent popularity but unnecessary in international settings [Geilens et al. ‘08; Srinivasan & Hanssens, ‘09)] Expected return in event window is determined and difference to actual return is “abnormal return” Event indicator model Karafiath ‘88 and then Leeds et al. ‘07 have advocated for the dummy variable indicator model, which allows for a statistical test the significance of abnormal returns at the firm-level. (though the significance of the dummy variable coefficient). Cross-sectional analysis of effect given by both models in various event windows.
  • Only Farrell & Frame ‘97 found negative effect (Olympics, [0,2] window, 26 firm sample exclusive to US) Market seems to categorize these promo alliances as cost rather than strategic investment (Slywotzky & Shipero ‘93 HBR). -- Categorization imperative (Zuckerman ‘99). [Limitation] Assumption that information is accurately interpreted and acted on by market actors. Irrationality cancels out.
  • [Markets view these alliances as costs vs. investments – strategy not recognized (Slywotzky & Shapiro ‘93 HBR) Utilizing the event indicator dummy variable in the market model shows firm-level significance of abnormal returns (Leeds et al. ‘07) Unbalanced relationship returns : Promoting enterprises flourish while sponsoring firms lag. Market actors don’t make leap from announcement to positive future cash flows Agency conflict (Pruitt, Cornwell and Clark, 2004 NASCAR): extravagant entertaining in Paddock Club Evidence of 2-step process at least (Ramaswami et al. ‘09 – must impact market-facing process [new prod dev.; orders; loyalty prog] before financial impact. Must provide ROI info that allows for categorization and comparison to other firm activities familiar to market actors (Zuckerman ‘99)
  • These alliances do not exist in isolation . ..but rather as a network Brand spillover within promo alliance networks (Groza – Winter AMA) Execs’ emphasis on business between portfolio partners Hospitality (Clark et al.) and credentialing – [Stuart et al.] UUNRECOGNIZED STEP: 2 step process (Rama-swami et al., 2009) marketing initative -> market-facing process -> financial value
  • F1 Sponsor - Stock Mkt Impact, Cobbs et al.

    1. 1. A Global Markets’ Perspective of International Commercial Sponsorship <ul><ul><li>AMA Summer Conference </li></ul></ul><ul><ul><li>Sunday, August 15, 2010 </li></ul></ul>Joe Cobbs Northern Kentucky University Mark Groza University of Massachusetts Stephen Pruitt University of Missouri - Kansas City
    2. 2. Presentation Overview <ul><li>Research question: </li></ul><ul><li>Does commercial sponsorship of Formula One racing add shareholder value to the sponsoring firm? </li></ul><ul><li>Theory: Commercial sponsorship as a strategic alliance </li></ul><ul><li>Context </li></ul><ul><li>Method & Results </li></ul><ul><ul><li>Event study stock analysis </li></ul></ul><ul><li>Implications & Conclusions </li></ul>
    3. 3. Sponsorship as a Strategic Resource <ul><li>Strategic Alliance: a manifestation of interorganizational cooperative strategies that entails the pooling of skills and resources by the alliance partners, in order to achieve one or more goals linked to the strategic objectives of the cooperating firms. ( Varadarajan & Cunningham, 1995) </li></ul>Promotional Alliance: a strategic alliance based on resource exchange between a promoting enterprise and a firm seeking to fulfill promotion-based objectives through an ongoing collaboration with the enterprise. Sponsorship: the provision of assistance either financial or in-kind to an activity by a commercial organization for the purpose of achieving commercial objectives. ( Meenaghan, 1983)
    4. 4. Sponsorship as a Strategic Resource <ul><li>Value to the sponsoring firm </li></ul><ul><ul><li>Contingent goodwill (Meenaghan, 2001) </li></ul></ul><ul><ul><li>Image transfer (Gwinner & Eaton, 1999) </li></ul></ul><ul><ul><li>Interest  Favorability  Use (Speed & Thompson, 2000) </li></ul></ul><ul><ul><li>Critical sales event (Clark et al., 2003) </li></ul></ul><ul><li>Source of a competitive advantage? </li></ul><ul><ul><li>Corporate image and reputation (Amis et al., 1997) </li></ul></ul><ul><ul><li>Leveraged with marketing resources (Fahy et al., 2004) </li></ul></ul><ul><ul><li>Collaboration (Amis et al., 1997; Farrelly et al., 2003) </li></ul></ul><ul><ul><li>Brand differentiation (Cornwell et al., 2001) </li></ul></ul>
    5. 5. Investigative Context <ul><li>Formula 1 motor racing </li></ul><ul><li>International spectacle </li></ul><ul><ul><li>Massive global TV audience (Edgecliffe-Johnson, 2008) </li></ul></ul><ul><ul><li>Annual season of 17-20 races </li></ul></ul><ul><ul><li>on 5 continents </li></ul></ul><ul><ul><li>Teams representing 7 nations </li></ul></ul><ul><ul><li>Drivers from 12 countries </li></ul></ul><ul><li>Intense corporate involvement </li></ul><ul><ul><li>41 of Interbrand’s Top 100 global brands </li></ul></ul><ul><ul><li>Annual corporate commitments over US $100M </li></ul></ul><ul><ul><li>Considerable involvement beyond monetary investments </li></ul></ul><ul><ul><li>(Jenkins & Floyd, 2001) </li></ul></ul><ul><ul><ul><li>i.e. technological development, credentialing, B2B networking </li></ul></ul></ul>
    6. 6. Investigative Context
    7. 7. Method & Data <ul><li>Event Study Analysis </li></ul><ul><ul><li>Measures stock price impact (Fama, 1970; Karafiath, 1988) </li></ul></ul><ul><ul><ul><li>Announcement of brand extension (Lane & Jacobson, 1995) </li></ul></ul></ul><ul><ul><ul><li>Addition of an internet marketing channel (Geyskens et al., 2002) </li></ul></ul></ul><ul><ul><ul><li>Product placement in films (Wiles & Danielova, 2009) </li></ul></ul></ul><ul><ul><ul><li>Celebrity endorsement (Agrawal & Kamakura, 1995) </li></ul></ul></ul><ul><ul><ul><li>Commercial sponsorship (Cornwell, Pruitt, Clark studies) </li></ul></ul></ul><ul><ul><li>Does sponsorship value outweigh costs, creating an expectation of future cash flows? </li></ul></ul><ul><ul><li>Sample </li></ul></ul><ul><ul><ul><li>- Alliances involving public firm with identified announcement (n=73) </li></ul></ul></ul><ul><ul><li>Stock parameters determined in estimation window (-250 days) </li></ul></ul><ul><ul><ul><li>Event window (0,+1) designated to capture announcement of event </li></ul></ul></ul><ul><ul><ul><li>Thomson Reuters Datastream </li></ul></ul></ul>
    8. 8. Event study models & results E(R it ) = α i + β i R M t + e it   2-Step Market Model Full Indicator Model Event Window Mean CAR (%) t-statistic Evt. Wdw. Dummy β t-Statistic -5, +5 -0.6764 -0.81   -0.00077 -0.99   -2, +2 -0.4572 -0.94   -0.00084 -0.74   -1, +1 -0.5338 -1.51   -0.00172 -1.18   -1, 0 0.2483 0.82   0.00155 0.87   0 -0.1669 -0.97   -0.00110 -0.44   0, +1 -0.9442 -3.30 *** -0.00468 -2.62 *** 0, +10 -1.8135 -2.22 ** -0.00170 -2.19 ** 0, +20 -0.2978 -0.24   -0.00008 -0.14   ** p < .05; *** p < .01
    9. 9. Results & limitations <ul><li>Negative influence on value </li></ul><ul><ul><li>Contrary to prior research </li></ul></ul><ul><ul><ul><li>International context </li></ul></ul></ul><ul><ul><ul><li>No difference between markets </li></ul></ul></ul><ul><ul><ul><ul><li>Asia, Japan, Europe, U.S. </li></ul></ul></ul></ul><ul><li>Limitations </li></ul><ul><li>Stock price – one measure of value </li></ul><ul><ul><li>- Reliant on efficient markets hypothesis </li></ul></ul><ul><li>Methodology tradeoffs </li></ul><ul><ul><li>- Limits sample size, reaction window </li></ul></ul>
    10. 10. Implications <ul><li>Research contribution </li></ul><ul><li>Counters dominant view of sponsorships’ market impact </li></ul><ul><ul><li>Promotional alliance commitments as costs v. investments </li></ul></ul><ul><ul><li>Relative consistency across international markets </li></ul></ul><ul><ul><li>Statistical significance at the firm level in dummy model </li></ul></ul><ul><li>Applied contribution </li></ul><ul><li>Potential agency conflict </li></ul><ul><li>Necessary public reformulation of “sponsorship” </li></ul><ul><ul><li>Bilateral imperative </li></ul></ul><ul><ul><li>Process of market understanding & categorization </li></ul></ul>
    11. 11. Conclusion <ul><li>“… the perception of a Formula One deal is extraordinarily expensive because the vast majority of people don’t understand the value that a company gets out of the relationship. …[Analysts] would just see the bottom line figure of a marketing spend and not see the benefits come back in the other way.” </li></ul><ul><li> - F1 Team Executive </li></ul><ul><li>Moving Forward: Modeling significant negative returns </li></ul><ul><li>Magnitude of investment </li></ul><ul><li>Nationality & functional congruence </li></ul><ul><li>Leverage initiatives </li></ul><ul><li>“ We tried to justify that (ROI) as much as we possibly could. Where most (sponsored) organizations fell short was in providing activation activities that would provide you with a positive return on investment .” </li></ul><ul><li>- Sponsoring Firm Executive </li></ul>
    12. 12. Thank You Questions/Comments?