Understanding Financial Markets: A Social Psychology (Essay Sample)

Understanding Financial Markets: A Social Psychology ViewBy: NameCourseInstructorInstitutionLocationDate
Introduction
Traditionally, “economists emphasize the capacity of markets to aggregate information distributed among traders into rational equilibrium prices” (Sonnemann et al. 2013, p.1). It is presumed that while making investment decisions every trader usually makes rational preferences (Edman et al. 2007). This concept of rationality is at the centre of traditional finance. However, Sulphey (2014, p.40) notes that this is not always the reality because sometimes “investors tend to reduce complexities by resorting to simple judging operations, where only certain information is included in the decision making process” which “could lead to a host of cognitive illusions, errors and biases.”
Taking into account that soccer is an economically neutral event, one would expect that it would not have an impact on the stock market but as Boyle and Walter (2010) point out this is always not the case. Economaki’s (1997, p.25) provides a good example of the market anomalies by highlighting a common saying in Detroit used by automobile manufacturers: “Win on Sunday, sell on Monday.” As it appears, the expression is propelled by the reasoning that forecasts of automobiles sales can be made using the outcomes of a match.
Essay question
Over the years sports has evolved into a way of communication that makes it easier for businesses to generate publicity to a larger audience. Nowadays, the amounts of money invested in sponsorship deals are enormous. According to IMR Sports Marketing (2014), the English Premier League alone generates approximately 460 million Euros. When sponsors are identified with sports fixtures, people will in some way directly or indirectly link the sponsor to the image of the organisation. Take for example, Company B which manufactures consumer electronics and is listed on the London Stock Exchange sponsors a certain football Club A which has lost three of its matches in a row. The essay question is: will the share price of the sponsor Company B be affected by the Club’s performance?
Response
Whereas the impact of football match outcome on the share price of the football club has been largely reported, its effect on the share price of the sponsor has not been extensively documented. Just as with other major announcements, new sponsorships have been shown to have an effect on the value of company’s share price (Clark, Cornwell and Pruitt 2002). However, the nature of the relationship between sponsorship and consumer purchase intentions still remains unclear (Smith et al 2008; McNeil 2014). Furthermore, there are a number of difficulties in explaining the effect of sponsored football club’s performance on the sponsor company which include the difference in clubs’ status and expectations. In some instances, the loyalty of fans to a particular sports club ensures continuous support as well as consumption behaviours (Smith et al 2008, p.389).
McNeil (2014, p.41) asserts that “clubs with greater levels of commercial activity and club support have sponsors with stock prices that are affected by on-field results of that EPL football team.” At the companies’ level, the stock returns as well as the trading volumes of soccer clubs in UK have been found to be very sensitive and both Palmino et al. (2008) and Edman et al. (2007) attribute the sensitivity to overreactions which are stimulated by sentiments of the investors rather than by rational expectations. To some extent, sporting results have been found to influence trading activities at the local level (Edman et al. 2007; Chang et al. 2012). This means that the sentiments of the investors impacts on their feelings towards firms associated with sporting events and can as well extend to the locality. As a result, it is possible that the performance of football Club A could have a similar effect on investor sentiment which will as well be mirrored in the share prices of the sponsor company B. Therefore, the share price of Company B could fall.
It has been shown that football match results can affect the prices of club’s shares by changing investors’ confidence as well as mood (Edman et al. 2007). At the international level, the impact of soccer results has been found to affect a larger population, especially if the participating club emanates from a nation that values soccer (Edman et al. 2007). Therefore, if a football club participates at an international soccer match and wins, Edman et al. (2007) reveals that the Club’s supporters would react positively but if the team fails the supporters would react negatively which will in turn affect their moods. The change in investors’ moods is oftentimes reflected in the stock returns particularly with small stocks. This is because the majority of those who are likely to invest in small stocks are local investors. Therefore, when football club A is playing an international match and loses its match it is more likely to affect the moods of many local investors negatively. As a result, a negative stock market response with regard to Company B’s share price at the London Stock Exchange is also expected.
It is extensively recognised that people have limited capacities for processing information (Hirshleifer et al. 2006). As a result, it is possible that investors may focus their attention as well as time on information that is highly visible and simple to process. That is to say, an individual’s limited capacity to process information may result into inattention. One of the ramifications for this is that individual’s responses to news rely on its relative importance: when the level of information salience is higher, investors process the information faster and is mirrored in the share prices. Thus, in order for irrational investors to have an impact on share prices, they have to pay attention to the stock market and take part in trading. Sponsoring a football club is a huge decision for an organisation because it is usually a long-term obligation that demands considerable amounts of investment. Nevertheless, a sponsor company’s share price can be influenced by a number of instances such as the declaration of the sponsorship contract depending on whether the market considers the deal as something good or bad. Similarly, a sports club’s good performance can impact on the share prices in the sense that by sponsoring a club that does not perform well the sponsor can be associated with non-performance or a club’s match loses can affect the mood of the individuals who invested in the sponsor’s stock negatively.
Both negative and bad news have different impacts on people’s perceptions and negative news exerts a stronger impact than positive news. The media generally tends to put a certain emphasis in the news in order to make it more engaging to the public. In a study conducted by Kirschler and Hinker (2010) it was established that sponsoring a team that wins most of its matches appeared to have limited consequence on the stock price nonetheless losing influenced the security negatively. Attention paid to sport events takes divergent sizes and shapes. When a club experiences what is considered to be overwhelming loss or win it could be more impactful and noteworthy for the newspapers as well as other forms of media. In the event that the football club does not perform well, it is probable that it would not get much media coverage, suffer damaged reputation and lower demand for club’s matches all of which may impact the sponsoring company. Essentially, an event in competitive sports can determine a club’s failure or success and by that means the value of the sponsoring firm. Thus, Club A’s three consecutive match loses could have a negative impact on Company B’s share price.
Sponsorship can cause stock prices increase and thereby increasing firm’s value. However, the value is powered by factors such as the normalcy of the win and the compatibility between the winning club and the sponsoring company (Cornwell 2001, p.29). That is to say, if the relationship between the sponsor company and the sponsored football club is perceived to be tight, the sponsoring company earns more value. By winning a match, the sponsored football club can boost the sponsor through visual or textual coverage of the sponsor company afterwards. As mentioned by Barber and Odean (2008) investors buy those stocks that capture their attention. A sponsor of a club that emerges victorious could certainly be categorised as a stock that could capture the attention of investors via exposure of their brand and logo in connection with football club. It is interesting to note that in Europe, especially in the five countries that were mentioned earlier, there are newspapers that are devoted to sports reports especially football. As a consequence, if Company B is perceived to have a close relationship with Football club A and the Club’s loss was viewed as a big loss the company is more likely to experience negative publicity therefore lowering its share prices.
Events that capture people’s attention are presumably capable of anticipating the buying behaviours of investors in spite of the fact that the event itself may not hold any rudimentary information. Football matches that are played on Monday and during prime time hours are more likely to receive higher levels of publicity. This implies that sponsoring companies are extra visible for matches that are held when public’s attention is high and therefore alluding to Gwinner and Eaton (1999) there should be image transfer between the Football Club and the sponsoring firm. Consequently, if the football Club A played its matches when the public’s lev...