Spurious Academic Study of the Day, Tiger Woods Edition

Includes: ACN, NKE, PG
by: Felix Salmon

You knew it had to happen at some point: a couple of economics professors at UC Davis have done an “event study” of the Tiger Woods news cycle, and concluded that

In the days beginning with Tiger Woods’ recent car accident and ending with his announced “indefinite leave” from golf, shareholders of companies that Mr. Woods endorses lost $5-14 billion in wealth.

This is silly stuff, of course: not only are the error bars larger than the estimated losses, but a huge proportion of those multi-billions comes from the decline of the share price of enormous companies like P&G (NYSE:PG), which had just one exposure to Tiger Woods through its Gillette subsidiary. Drawing a causal relationship between the Tiger Woods scandal and fluctuations in P&G’s share price is simply impossible.

What’s more interesting to me is that the numbers got weirdly changed when the UC Davis PR department got its hands on them and led not with the $5 billion to $14 billion range, nor with the $14 billion maximum figure, but rather with this:

Tiger Woods Scandal Cost Shareholders up to $12 Billion

I have no idea where the $12 billion number came from, as distinct from the $14 billion number in the study. But that’s the number that the WSJ’s Stephen Grocer decided to go with as well.

And how do the authors explain away the inconvenient fact that Tiger’s highest-profile sponsor, Accenture (NYSE:ACN), saw no losses at all? You’re going to love this one:

Economic theory predicts that Mr. Woods should be able to capture nearly all of the excess profit generated by his endorsement of a firm like Accenture. For Tiger Woods, having Accenture as a sponsor probably does not increase the overall value of ‘the Tiger brand’ all that much. Mr. Woods should therefore have a lot of bargaining power when negotiating that deal, and may be able to extract a payment very close to Accenture’s incremental profit from the relationship. And if Accenture is paying Mr. Woods something very close to its extra profit from his endorsement, it is not much worse off without him than with him. Indeed, our estimates show no ill effect at all for Accenture after the accident.

This is completely bonkers. For one thing, the authors — Christopher Knittel and Victor Stango — have already pegged the value of the Accenture contract at $20 million a year — the same amount as the Gatorade (NYSE:PEP) contract, and less than the Nike (NYSE:NKE) contract. They then go on to say that the harm to Accenture of losing Tiger is unlikely to be much more than the $20 million that Accenture was paying him. Which might make some sense, if it wasn’t for the fact that they’re pegging the harm to everybody else of losing Tiger at $12 billion. (Or $5 billion, or $14 billion, or, well, just pull a number out of thin air, really.)

Accenture is clearly the biggest loser from the whole Tiger affair: it has to scrap its entire global marketing strategy and start from scratch. What’s more, Accenture’s total Tiger-related marketing spend is vastly greater than the $20 million a year it’s paying Tiger personally. The company has run into a large unexpected tail event, in a way that Nike and Gatorade haven’t. Those companies sponsor lots of athletes: one more or less has an effect at the margin, but that’s about it. If the Tiger scandal had no visible effect on the Accenture share price, you can be sure it had no effect elsewhere.