Academic journal article American Economist

Determinants of Golf Tournament Earnings

Academic journal article American Economist

Determinants of Golf Tournament Earnings

Article excerpt

I. Determinants of Professional Golf Tournament Earnings

Maximizing the value of the firm is generally considered the basic fundamental of financial management. To maximize the value of the firm, financial managers should undertake investments that increase the value of the firm. Such an objective can be met by undertaking projects with positive net present values (Brealey and Myers, 1991). However, when ownership and management of a firm are separated, as in the case of a corporation, a conflict between managers and owners, known as the agency problem may result (Jensen and Meckling, 1976). The agency problem can lead managers to pursue goals such as revenue maximization, or the maximization of perquisites that are not consistent with the value maximization objective.

Professional golfers represent an interesting study of financial management decision making in the absence of an agency problem. Professional golf (along with tennis) is unique in professional sports because it represents a relatively pure form of capitalism. Unlike many professional team sports, golfers have no guaranteed contracts. Their tour earnings are based solely on current performance.(1) In addition, golfers are responsible for their own travel, caddie and meal expenses. Therefore, from a financial perspective, golfers should base their investment decisions on which aspects of their game to practice by determining which skills lead to the greatest increase in earnings.

This study examines the determinants of professional golf tournament earnings for PGA, LPGA, and Senior PGA, which has not been previously addressed in the literature. However, three recent articles have examined the incentive effects of golf tournaments. Ehrenberg and Bognanno (1990a) analyze the 1984 Men's PGA data, and conclude that the level and structure of tournament prize money do influence players' performance. Higher prize levels lead to better performance (lower score), but this effect occurs primarily in the later rounds of a tournament and especially for players that have exemptions to play on the tour the following year. Ehrenberg and Bognanno (1990b) use data from the 1987 European Men's Professional Golf Association Tour and find that players' performance appear to be positively affected by the total tournament money and the marginal return to effort in the final round of play. Recently, Orszag (1994) reports that, using data from the 1992 Professional Golf Association Tour, the level of tournament money has an insignificant effect on performance.

This paper examines the factors that are most important in determining the earnings of professional golfers. The organization of the paper is as follows. The next section discusses the structure of the PGA tour. Section III presents the data and some summary statistics. In section IV, the results of regressions of tour earnings on various performance variables are presented. Finally, section V concludes the paper.

II. The Basic Structure of the Tour

In any given tournament the number of golfers wishing to compete will exceed the number of entrants a tournament can support. Therefore, the Professional Golf Association (PGA) has structured a system to determine who can enter a tournament. Players who can enter a tournament include the top 125 money winners from the previous year, winners of tournaments over the last two years and winners of major tournaments, such as the US Open, the Masters, and the PGA Championship, from the past ten years. Players can also gain exemption to the tour by placing high enough in the tour qualifying tournament known as the tour school or by becoming one of the top 10 money earners in the tour's "minor league", known as the Nike Tour from the previous year. Finally, sponsors of tournaments receive a number of exemptions that can be used to invite players who do not qualify under other categories.(2)

Even after a golfer has entered a tournament, there is generally no guarantee of any prize money. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.