Rational Exuberance? an Event Analysis of the 2008 Olympics Announcement

Article excerpt

Abstract

China spent far more on the 2008 Olympiad than any previous host country. A retrospective assessment of the benefits of the 2008 Games to the Chinese economy will not be possible for several years. We use an adaptation of event study methodology that has been employed by studies of previous Olympiads to analyze the expected benefits of the 2008 Games. We show that the announcement that Beijing would host the 2008 Games led to a brief rise in the Shanghai exchange, but the euphoria quickly dissipated. We find that there was no corresponding decline in the stock exchanges of Beijing's closest rivals for the 2008 Games. There was a longer lasting impact on specific sectors of the Shanghai exchange, but this impact was not always positive.

Keywords: Olympics, event study, holding period return

Introduction

The 2008 Olympics were the most anticipated Games in recent memory. To some, the Games were a celebration of China's joining the world's leading economic and political powers. They believed that the 2008 Games resembled the 1964 and 1988 Games, which served a similar purpose for Japan and South Korea. Others saw the Beijing Games as an echo of the 1980 Moscow Games or the 1936 Berlin Games, in which repressive regimes sought to buy legitimacy by staging lavish Olympics.

Despite the disagreement over the purpose of the 2008 Games, all can agree on one point: These were the most expensive Games ever staged. The estimated cost of the facilities, related infrastructure (such as subway systems and roads), security, and operations of the Beijing Games added up to more than $40 billion. This figure dwarfs the roughly $12 billion spent on the 2004 Athens Games and the $1.7 billion spent on the Sydney Games.

In this paper we investigate whether China expected to profit financially from staging such an expensive Olympiad. In particular, we test whether the announcement that Beijing would host the 2008 Summer Olympics caused abnormal returns on the Shanghai Stock Exchange (SSE), China's largest stock exchange.1 To do this, we perform an event analysis of holding period returns to the SSE Composite Index (SSECI). Following previous event studies of Olympic announcements, we specify an AR(1) process to test for abnormal returns. We extend analyses of previous Olympics by expanding the event window beyond the period that immediately followed the announcement. Using this technique, we find that the announcement caused an immediate rise in holding period returns to the SSECI. The negative returns that followed this brief rise quickly wiped it out and led to negative returns over the full 21- day event window.

We also analyze the impact on two finalist countries that lost their bids to host the 2008 Games.We find that losing the Games had no statistically discernible impact on holding period returns for either Canada or France.

Finally, we show that the impact of the announcement varied across sectors of the Chinese economy. The holding period return rose for the Properties and Utilities indices on the SSE, but it fell for the Industrial index. The Commercial index was not affected by the announcement.

In the next two sections of this paper, we present the results of event studies of previous Olympic Games and briefly explain how the studies differ from typical event studies. In the Estimation and Data section, we explain our estimation method. The last two sections contain our results and conclusions.

Previous Event Analyses of Announcements of Olympic Venues

Berman et al. (2000) and Veraros et al. (2004) use event analysis to examine the impact of the announcement that Sydney and Athens, respectively, would host the 2000 and 2004 Summer Games. These studies ask whether investors believe that hosting the Olympics will stimulate the nation's economy, or at least benefit specific sectors of the economy. If investors hold such beliefs, then the announcement that a nation will host the Games is a positive shock to investors and will cause stock prices to rise. …