Olympic Sponsors: Do They Provide Abnormal Returns?

Includes: KO, MCD, NKE, PG
by: Charles Alcorn

Following the opening ceremony July 27, the 2012 Summer Olympics Games will be televised into millions of homes along with savvy TV commercials from Olympic sponsors vying for our attention and wallets. Procter and Gamble (NYSE:PG) will join other long-term sponsors including McDonald's (NYSE:MCD), Coke (NYSE:KO) and Visa (NYSE:V) and will use that sponsorship to sell everything from Powerade to Pepto-Bismol. Their inclusion into the elite club of 2012 Olympic Worldwide TOP Partners gives them perks such as the right to use the Olympic symbol and trademarks. So how will PG use the Olympics to sell seemingly unrelated products such as Pampers? In a recent interview with PG External Relations Manager for U.S. Operations, Glenn Williams, "Pampers is all about the baby Olympics. When a toddler is learning to walk and falling, those are Olympic events. Pampers are designed to allow that kind of movement and flexibility for babies to explore the world." A bit of a stretch (pun intended), but effective I guess.

In 2008, it was estimated that KO spent over $70M for the rights to be an Olympic sponsor (Lim, 2008). With a 2008 advertising budget of nearly $3B, this is a paltry amount. However, this is just a ticket to the dance as many more expenses are in order to go from Olympic sponsor or partnership to developing advertising campaigns and securing ad space in print and digital media to capitalize on that sponsorship. Add to that the very strict compliance issues that come with an Olympic sponsorship, (Skildum-Reid, 2009) one can start to question if such spending is warranted.

This is a tough question as I suspect these sponsorships go well beyond an initial quarterly or annual jolt to the stock price. A series of sponsorships may do more to secure a new generation of customers and to maintain a long-term competitive edge of a sponsor's product. Think of the long-term competitive edge between MCD and Burger King (BKW), which may explain why PG announced a partnership with the International Olympic Committee through 2020 (P&G Corporate Announcement, 2010).

With that said, it is interesting to see how a long-term Olympic sponsor's stock has reacted before, during and just after the Olympic games. Does an Olympic sponsor provide abnormal returns during the Olympics given their right to use the Olympic symbol and trademarks on their products combined with savvy day-in and day-out marketing campaigns? Specifically, all else being equal, is there an edge investing in a top Olympic sponsor in the next few weeks? To do this, returns from companies that had major involvement in the past seven Olympics either through significant sponsorships or other high visibility activities will be analyzed. KO, MCD and Nike (NYSE:NKE) fit this profile.

The data shown in the charts below are mean returns for any given day that falls between 10 trading days prior to the opening ceremony (represented by negative numbers on the x-axis) and 20 days after the opening ceremony. All returns are relative to the closing price on the day of the opening ceremony. For both KO and MCD, mean returns prior to the opening ceremony are flat, however that changes as the Olympics shift into full gear. Mean returns for the past seven Olympics drift higher and reach between 4% and 5% as the Olympics draw to a close (about 15 trading days after the opening ceremony). Notice, however that returns are somewhat choppy as shown by adding and subtracting one standard deviation (+/- 1σ) from the mean. At +10 trading days, KO's returns are positive between +/- 1σ indicating a 68% probability of a positive return. MCD shows about a 68% probability of a positive return 16 trading days after the opening ceremony.

Results are also shown for NKE; however only six Olympics are used to derive the NKE data (NKE was not publicly traded until 1987). While NKE is not a 2012 Olympic Worldwide TOP Partner like KO and MCD, it has a deal to provide footwear, apparel and medal stand outfits to athletes (TeamUSA.org, 2012). NKE has taken on a similar role in past Olympics and will surely infuse its famous logo on TV screens across the globe. Based on the dataset, NKE shows a similar pattern of returns with a 68% probability of a positive return 17 trading days after the opening ceremony.

The following table summarizes the best opportunities for a positive return based on the above figures.

The data seems to indicate that there is an advantage for these preeminent "Olympic stocks" albeit with an admittedly sparse set of samples (nothing is ever perfect). But not so fast... if a trading advantage existed then one would also expect that these stocks would show superior returns relative to the overall market.

The last chart in the figure shows returns for the S&P 500 (NYSEARCA:SPY), which is used here as an overall proxy for the market. Clearly, the pattern of returns for the S&P 500 is similar to the other three stocks showing a mean return of 3% about 15 trading days after the opening ceremony. However, the best returns for KO, MCD and NKE are larger and occur at slightly different times.

The best method to assess if the results in the above table are statistically superior to those for the S&P 500 is a t-test. A t-test checks if the mean of a data set (mean stock returns for KO, MCD and NKE) are statistically different from another data set (mean S&P 500 returns). The process for t-testing is a bit tricky, but starts with defining a null hypothesis which will be tested. The null hypothesis for this analysis is:

Null Hypothesis: "Returns for KO, MCD and NKE are statistically the same as for the S&P 500"

Obviously, our goal is to disprove the null hypothesis. If we can reject the null hypothesis, then the results in the above table are statistically different from the overall market. Results for a t-test for the MCD dataset are shown in the table below. Those familiar with t-tests realize that the P-Value is very high indicating that we cannot reject the null hypothesis. In loose terms there is a 57.9% chance that the null hypothesis is correct.

Similar results occur for KO and NKE as well indicating that their mean returns are not statistically different from those of the overall market (as represented by the S&P 500). This would indicate that while there is evidence of a bias for these stocks to drift higher as the Olympics progress, this bias is not related to their status as a long-term Olympic sponsor. There does seem to be a bias for the overall market (and the share price of KO, MCD and NKE) to trend higher during the Olympics albeit the data sets are sparse as mentioned. Perhaps what trend is present is due to a feeling of national pride one gets from watching the Olympics that translates to improved investor sentiment. I don't know, but interested in your feedback and thoughts.

Disclosure: I am long MCD.