Do Investors Use The Olympics As A Category For Investment And Should They?
Patricia M. Dechow
University of California, Berkeley – Haas School of Business
Alastair Lawrence
University of California, Berkeley – Haas School of Business
Mei Luo
Tsinghua University – School of Economics & Management
June 23, 2016
Abstract:
There is a seven year period between the time that a country first learns that it has won a bid to host the Olympics to the playing of the games. We investigate whether investors use the Olympics as a category for investment over this time period. We examine two hosting countries: China in 2008 and the UK in 2012, and identify a set of stocks from a broad range of industries that are mentioned by media outlets as either directly or indirectly involved in the Olympics. We find that in both countries, Olympic stocks exhibit increases in comovement of returns after the Olympics are announced and declines in comovement after the games are played. We also find that Olympic stocks earn large excess returns when the stock market has performed well, consistent with investors moving funds into these stocks after observing strong past stock price performance. However, these excess returns are lost in subsequent market downturns. Further, evidence suggests that the Olympic Games have little impact on cash flows or earnings. Overall, our evidence suggests that Olympic “euphoria” is sufficient in both China and the UK to influence stock returns and valuations but the overall fundamental benefits of the Olympics are small.
Do Investors Use The Olympics As A Category For Investment And Should They? – Introduction
The Olympics are one of the most exciting media events in the world. The number of people estimated to watch the Olympics is over 4.6 billion, representing approximately 70 percent of the world’s population (Nielsen 2008). Given the global attention, hosting nations often experience significant national pride as the world’s focus shifts to that country in the lead-up to the Olympics. We investigate whether the excitement and visibility of the Olympics impacts the equity valuation of host-country firms that are expected to benefit from the Olympics (hereafter, “Olympic stocks”). Olympic stocks include those in the airline, construction, hospitality, media, and service industries that either directly or indirectly contribute to the broader Olympic experience.
There is a seven-year period between the time that a country first learns that is has successfully won a bid to host the Olympics to the playing of the Olympic Games (we term this the Olympic period). We investigate whether Olympic stocks are used by investors as a category for investment during this time period. There are several reasons why this could occur. First, when a country wins a bid, it is common for government officials to discuss the expected economic benefits to the hosting city or country from the Olympics.1 If investors then infer from this good economic news provided by experts that certain stocks are likely to disproportionately benefit (those involved in the Olympics), then this news can create new demand for such stocks irrespective of how much the firms actually benefit from the Olympics. Second, the Olympics are an interesting news story for people in hosting countries. During the Olympic period, the media gives frequent updates on the construction progress being made towards the Olympics, gives estimates on the number of tourists that will visit, and discusses other benefits of the games. The media also frequently combines news of the Olympics with the performance of the stock market discussing which companies are likely to benefit. This greater media focus is likely to increase investor attention on Olympic-benefiting stocks and potentially bias them towards selecting these stocks for investment.
We predict that if investors use the Olympics as a category for investment, then the stock returns of Olympic stocks are likely to exhibit increases in comovement with the market return. This result occurs because investors are no longer purchasing Olympic stocks based on fundamental news but instead are purchasing them based on their “Olympic” attribute. We predict increases in comovement after the winning bid is announced and declines in comovement after the games are played. Our second prediction relating to categorization investigates the valuation of Olympic stocks. The Olympic time period is quite long – seven years – so it is very likely that stock markets will both rise and fall during this time horizon. Research on speculative bubbles suggests that bull and bear markets can be exaggerated because of “noise” traders. Specifically, there is a feedback loop where a subset of investors respond to rising prices by purchasing equities and the demand from these investors creates additional price pressure on equities, pushing their prices even higher.2 Expanding on this idea, if the high media attention on the Olympics encourages a subset of “noise” investors to use the Olympics as a category for investment, then Olympic stocks will have relatively more upward price pressure than other stocks when stock markets are rising. This price pressure in turn implies that Olympic stocks will earn large abnormal returns in rising markets that will be lost in subsequent market declines.
We investigate the pricing of Olympic stocks in two hosting countries: China and the United Kingdom (UK). China held the Olympics in Beijing in 2008 and the UK held the Olympics in London in 2012. We identify 72 Beijing Olympic stocks that are included in publicly available lists of Olympic theme stocks on investing and social media websites in China. These lists supported much hype and discussion of Beijing Olympic stocks on Chinese stock message boards and chat-rooms among retail investors.3 We use similar criteria to that employed by the Chinese media to create the London Olympic stock lists. We searched all news articles from the Financial Times for mentions of stocks that were expected to be involved in the London Olympics, and combine these stocks with the official list of London 2012 Partners provided by the London Olympic Games website. Our sample of London Olympic stocks consist of 63 firms.
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