Athlete Endorsement Contracts: The Impact of Conventional Stars

By Fizel, John; McNeil, Chris R. et al. | International Advances in Economic Research, May 2008 | Go to article overview

Athlete Endorsement Contracts: The Impact of Conventional Stars


Fizel, John, McNeil, Chris R., Smaby, Timothy, International Advances in Economic Research


Abstract Despite a continuing increase in the dollar value of athlete endorsement contracts and the prominence of athlete endorsements as a marketing tool, the value of endorsement contracts has gone largely unexamined. Employing event study analysis, this paper assesses the effects of endorsement contract announcements on changes in the share price of firms. In contrast to previous studies which focus on a single megastar athlete or sporting event and find significant positive returns to the firm, this study evaluates 148 endorsement announcements for conventional athletic stars in various sports and finds that the average endorsement contract has an insignificant impact on the market value of the firm. Also, there is no support of the product-endorser match-up hypotheses but endorsements by golfers do exhibit significant abnormal returns.

Keywords Athlete endorsement * Event study analysis * Athlete contracts

JEL Classification M00 * M21

Introduction

In June of 2003, LeBron James became the National Basketball Association's (NBA) number one draft pick and, prior to playing one regular season game, had signed a $90 million pact with Nike, plus millions of dollars in other corporate contracts with companies such as Upper Deck and Coca-Cola to endorse their products. James' agreement with Nike is second only to the $100 million deal struck with Tiger Woods, but substantially more than the $20+ million paid to Michael Jordan upon his return to the NBA in 2001 (Fisher 2003, p. 1 and Kurtz 2001, p. 1). Nike stock rose by 0.75% on the day the James' signing was reported, indicating that market investors thought Nike had developed a profitable strategy with the signing of James (Hiestand 2003, p. 11c). Not surprisingly, perhaps, athlete endorsements are the cornerstone of Nike's marketing activities.

Despite the apparent success of the Nike-James agreement, and the years of banking on big name athletes to build sales, some companies are beginning to believe that athlete endorsement contracts are not adding to their bottom lines. For example, Howard Burch (Sandomir 1998, p. C1), Vice President of Marketing for Fila America, suggests that "there has been an excessive saturation of athletes associated with signature products. It's too much of a good thing." Brett Shevack (1998, p. 26), CEO of a New York advertising agency, continues the argument stating that "...with few exceptions, nobody really knows which athlete is endorsing which company. Athlete endorsements have ceased to pay off. Ask any kid what brand of shoes Grant Hill wears. He probably won't say Fila."

These conflicting perceptions prompt the question: What is the economic value of an athlete endorsement contract? A number of studies have assessed how product endorsements by athletes may influence perceptions of a company and/or its product (e.g., Burnett et al. 1993; Thwaites 1995) but as Agrawal and Kamakura (1995, p. 56) state "a direct assessment of the effectiveness of a celebrity endorsement on a firm's profitability may be impossible" due to "the difficulty associated with isolating and measuring profit associated with a given endorsement campaign...." It is possible, however to examine how athlete endorsement contracts are perceived by the marketplace as a whole. If the investment market sees these contracts as being worthwhile, the adoption of such a strategy will add to the perceived value of the firm and should be reflected in the market price of the firm's stock (as in the Nike-James example above). Such changes in market value can be analyzed using event study methodology, which estimates the stock market's response to the public announcement of specific events like the signing of endorsement contracts.

Only a few studies have used event analysis to assess whether the benefits accruing to athlete endorsement contracts justify the costs of those contracts. Mathur et al. (1997) find that the announcement of Michael Jordan's retirement from professional baseball and return to the NBA in 1995 prompted a 2% increase in the market value of his client firms.

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