Journal of Sport Management, 2011, 7, 305-313 © 2011 Human Kinetics, Inc.

Stock Market Reactions and Formula One Performance Klaus Schredelseker and Fedja Fidahic University of Innsbruck Due to the global financial crisis, the investments of car manufacturers are going to be revised as never before; especially this is the case for any kind of commitment in sport sponsoring. In Formula One on the one hand costs are exploding, on the other hand money becomes shortened. That is why it becomes interesting to know to what extent a manufacturer’s involvement in this sport is worth it. We use an event study methodology analyzing the stock market response after race performances from 2005 to 2007. Our main results: McLarenMercedes and Fiat-Ferrari generate positive abnormal returns after wins for DaimlerChrysler and Fiat, and significantly weaker abnormal returns after losses. Conversely, returns for Renault change in an opposite way.

Introduction Companies involved in Formula One, one of the most popular sports worldwide, evaluate carefully their investments like in every other business. Due to Formula One’s enormous costs and its automotive background, the organizing FIA (Fédération Internationale de l’Automobile) is very sensitive to recessions. Nevertheless, on average 50 million people around the globe watch the Formula One races (BusinessF1, 2007, p. 555). In most countries the races receive the desired mass distribution for advertisers, sponsors and Formula One teams itself; this is exactly what it should do. Apparently Formula One is the European equivalent of NASCAR in the United States, but it is much more widespread internationally. The constant growth of sport’s patronage in general and commercialization has led to a corresponding increase in psychological and financial research to take more economic advantage of the events. However, unlike in other sports like American football or soccer, little scientific research has been conducted on Formula One. In times like these, however, the need for research due to the rising costs of manufacturers is inevitable. One of the key findings we can show, is that there is a link between the results of Formula One races and the share price reactions of the related firms; their money may thus not be badly invested. Our article is basically inspired by Dobson & Goddard (2001) and Mahar, Paul and Stone (2004). Dobson & Goddard (2001) show a direct link between the team performance on the pitch of England’s soccer clubs and variations in their respective share prices. They examined 13 publicly listed Premier League clubs during a Schredelseker and Fidahic are with the Dept. of Banking and Finance, University of Innsbruck, Innsbruck, Austria.

two-year estimation from 1997 to 1999. Accordingly the avoidance of relegation produced an upward adjustment of 22.5% on the next trading day, and relegation or failure to achieve promotion caused a down adjustment of 15.6% (Dobson & Goddard, 2001, p. 389). Furthermore, the elimination from either the national FA Cup or from European competition tends to cause a significant negative share price reaction, reducing a club’s market value by 2.5% and 5% respectively (Dobson & Goddard, 2001, p. 394). Compared with Formula One, however, there is a substantial difference: the Manchester United football team is competing as the business firm “Manchester United”, whereas Ferrari is competing just as a part of Fiat Industries and McLaren-Mercedes is competing as a team still less directly linked to DaimlerChrysler Corporation (since 2007: Daimler Corporation). Mahar, Paul and Stone (2004) analyze the stock price reactions to NASCAR races on sponsoring firms by examining excess returns; they find significant relationships in combination with race performance. The results are backed up by the study of Sullivan and Dussold (2003), who study the role of NASCAR sponsorship for the sponsors by explaining abnormal returns in the capital market. Sullivan and Dussold (2003) report that sponsoring companies show up with excess returns of 0.19 basis points on the day following a Winston Cup race. Accidents during the race effectuate abnormal returns of approximately 0.5 basis points. Mahar, Paul and Stone (2004) demonstrate that there is a significant correlation between race performance and abnormal returns. When Winston Cup points are taken into consideration as performance measurement, 0.003 basis points over average are generated. This figure appears very small, but unlike in Formula One, NASCAR drivers can gain many more points during a race. “A driver that starts the race is guaranteed 34 points. [ . . . ] The team that wins the race earns 180 points” (Sullivan & Dussold, 2003, p. 12). The effect

305

306   Schredelseker and Fidahic

is strongest for sponsoring companies from the motor car industry and the business-to-consumer sector and amounts to 0.43 basis points. Sponsoring seems to pay. Motivated by the positive results of the NASCAR studies we started our empirical research about the relationship between Formula One race outcomes and share prices of related motor car manufacturers. The main difference to the NASCAR study is that car manufacturers and not sponsors are analyzed. Manufacturers who, at least partly, design their own car and whose reputation as high-quality motor car producers is on stake, should account for stronger effects than outside sponsors who are affiliated just with their name and their logo. Our approach stems from capital market research. Using an event-study technique it asks whether the Formula One performance has an impact on the share prices of the winning teams. The article is organized as follows: in the next section we give a brief introduction to Formula One and we outline the reason why we studied it. In the third section we discuss some methodological issues and present the data used for the analysis. In the fourth section we summarize the basic results of our event study. We conclude outlining some possible avenues for future research in this and in related fields.

Formula One Formula One is the world’s highest class of open wheeled motor car racing and is organized by the motor sport world’s governing body “Fédération Internationale de l’Automobile” (FIA). The Formula One championship was first held in 1950 and consists of a series of “Grand Prix” races; at the beginning most Formula One races have been in Europe, in the last decades they expanded nearly all over the world. Toward the late years of the 2000s decade, all teams, whether directly related to car manufacturers or not, were facing sharply rising cost. This may be a reason why since 1984 only drivers from the teams Ferrari, McLaren-Mercedes, Renault, and Williams have been able to win the championship and all these teams have been supported by big motor car producers. This support has risen from $1.183 billion in 2006 to $1.286 billion in 2007 (BusinessF1, 2007, p. 200). There is no doubt that the car manufacturers want to get value for their expenditures, otherwise the invested hundreds of millions of dollars cannot not be justified to their shareholders and to the buyers of their cars. For instance, in the 2007 season the manufacturers invested very different amounts of money in their teams. Mercedes-Benz lodged the most money with $240 million, while Renault invested $130 million and Fiat only invested a paltry $6 million (BusinessF1, 2007, p. 280). Furthermore, the manufacturers not only invest differently in racing but all have a different status in the team. DaimlerChrysler or Mercedes-Benz is the “engine partner” of McLaren-Mercedes, Fiat is the owner and “team sponsor” of Ferrari and Renault is the “team owner” of the self-titled

team Renault F1. “There is no doubt that McLaren-Mercedes, mainly thanks to the largesse of DaimlerChrysler, is now the best funded team in Formula One. It has long ago surpassed Ferrari, the previous financial frontrunner” (BusinessF1, 2007, p. 293). “Of the major carmakers only Renault is modest in its spending, a legacy of historical economy” (BusinessF1, 2007, p. 200). In the case of Ferrari the resources are gathered from sponsors rather than from the parent Italian company. In 2007 the main sponsor, and title sponsor at the same time, Marlboro was convinced enough to commit to a $1 billion contract for five years or $200 million per year, making it the record annual spend for an individual sponsor in the history of the sport (BusinessF1, 2007, p. 292). Despite the long, two-decade tradition, the continuing collaboration is somewhat surprising because the tobacco advertising ban was enforced harshly in the sport, making Marlboro the last tobacco brand in Formula One. Obviously Marlboro is relying on the predominantly all-red car which provides the association with Marlboro from the past. However, the economic results of most Formula One teams, including the financially stronger teams such as McLaren-Mercedes and Renault, have been declining since 2006. “A lack of title sponsor in 2006 contributed to McLaren-Mercedes’s turnover tumbling by $5.9 million to $197 million and leaving it with an after-tax loss of $6.7 million. Renault’s after-tax loss of $3.9 million in 2006 came despite winning back-to-back world championships. The team’s turnover in 2006 increased 10 per cent to $260 million on the back of increased sponsorship, but its costs accelerated even faster” (Sylt & Reid, 2008). Usually the expenditure on team operations, travel, entertainment and marketing is almost equal to staff costs, and together they total approximately $120 million. Another $95 million is spent on producing the cars, amounting together to over $200 million (Sylt & Reid, 2008). These numbers demonstrate that the Formula One sport has become unsustainable for the long run. The financially stricken teams announced a 50% cut in operating budgets and measures to reduce costs for the 2010 season (Allen, 2009). Thus three large motorcar producers resigned from Formula One (Honda, BMW, Toyota), evidence enough for the enormous financial stress in this sport. Furthermore, the TV rating numbers are fluctuating and highly dependent on the success of certain drivers or racing teams. In Italy, for example, after a 23% decline between 2004 and 2005 and a loss of an average of two million viewers per race, the figures in 2006 reflected the revival of a winning Ferrari team. Twelve of the top twenty sports programs in Italy were actually Formula One races, and that’s in a year when Italy won the soccer World Cup (BusinessF1, 2007, p. 560). In contrast Germany witnessed a 20% decline in viewer ship after the retirement of Michael Schumacher at the end of the 2006 season (Edgecliffe-Johnson, 2008). Nevertheless, Formula One programs are a major promotional tool for the motor car companies, who want to prove that they are the best on the street and on the race

Stock Market Reactions and Formula One Performance   307

track. One possible explanation for striving for a Formula One involvement is the own permanent exposure and the attraction of sponsors, which are allured by success. It is no surprise that McLaren-Mercedes, Renault and Ferrari were in the healthiest positions because they had full sponsorship rosters from the outset of the 2006 season (BusinessF1, 2006, p. 504). Hence team sponsorship offers companies a close connection with Formula One most importantly a high image transfer. The exposure and awareness is fluctuating though and depending on success. Until the 2008 season a river of money from sponsors has flowed into Formula One. In 2007 “pure sponsorship was rated at $1.413 billion up from $1.3 billion in 2006 – an overall rise of six per cent year-on-year” (BusinessF1, 2007, p.478). The biggest spenders in sponsorship in the 2007 season were the technology sector, consisting of 75 sponsors and contributing $207.55 million in total, and the automotive sector, including 49 sponsors with a total of $167.35 million (see BusinessF1, 2007, p.272). These figures reflect what is really driving the business in Formula One. But again, Burkhard Göschel, former BMW Research & Development chief, stated to have no idea if the Formula One program sold one more car (BusinessF1, 2006, p. 502). Maybe that is why BMW announced the withdrawal from Formula One during the 2009 season. In addition, our research is motivated by the fact that Formula One became especially interesting over the seasons 2005–2007. Each of these years there has been a duel between two out of three racing teams. With just one exception, the world championship of 2005 was carried out between Renault and McLaren-Mercedes. In 2006 it was a duel between Renault and Ferrari, again with only one Grand Prix going to a different team. While McLaren-Mercedes represents the financially strongest team, Renault could win the drivers’ championship with Fernando Alonso consecutively in 2005 and 2006. On the other side, Ferrari won the drivers championship with Kimi Räikkönen and the constructors’ championship in 2007 with a smaller budget. However, this was facilitated by the cancellation of the McLaren-Mercedes points after an espionage affair. For the F1-community, the 2007 season was the most exciting for many years since only one point separated the top three drivers of Ferrari and McLaren-Mercedes, who divided the wins among themselves. Thus the three most influential teams in that period were without any doubt McLaren-Mercedes, Fiat-Ferrari and Renault, all three being embedded in a large motor car manufacturer and all three listed at major stock exchanges. That is why in the sequel our analysis deals exclusively with these three teams.

Methodology and Data The research method is an event study analyzing the return on stock market prices of the aforementioned motor car manufacturers in the days following a Formula One Grand Prix. Event studies measure the impact of a specific event on the value of a firm which had this event by using financial market data. This technique was pioneered by

Fama, Fisher, Jensen and Roll in 1969; they analyzed 940 stock splits in the period from 1927 to 1959 and came to the conclusion that the stock market does not exhibit noticable “inefficiencies” and that stock prices adjust rapidly to new information (Fama et al., 1969). With 17/18 races per year the database we are studying is quite restricted and does not allow too sophisticated questions. That is why the emphasis of our study is more on “whether” the Grand Prix races have an impact on stock prices, and not so much on “when” such a pricereaction occurs. Therefore our study does not pretend to give an answer to the question whether the stock market is informationally efficient: for such a result much more data were requested, data which unfortunately do not exist. The null hypothesis in our analysis is that stock prices are unaffected by results of Formula One races. If the null hypothesis can be rejected, this may give some evidence to the financial usefulness of a participation in Formula One; the alternative hypothesis is that wins lead to a positive stock market reaction and that losses lead to a negative reaction. To measure the effect of race results on stock prices, we used a two-trading-days window. Since all races took place on a Sunday, the latest closing prices were on the preceding Friday and the abnormal returns have been calculated for the period Friday before to Tuesday after the race. The reason why we decided to take a two-days window instead of a one-day-window (till Monday) is that usually on Mondays the race outcomes are all over the news, the firms place their advertisements and even those people who did not watch television get aware of the results. The two-days window is justified by the fact that our goal was rather to show the magnitude of the pricing impact and not its timing; in the appendix it can be seen that the second trading day provides more distinctive results than the first day taken alone. To expand the window on three trading days, however, would involve too many risks of information distortion by simultaneous events not being related with the Formula One results. The risk that such events occur within our event window, is extremely low as usually major announcements (like earnings, stock splits, take-overs, changes in management etc.) are never given on Monday: during the whole period studied there was not even one ad-hoc-announcement reported on a Monday at the Deutsche Börse on behalf of DaimlerChrysler. Investors have certain expectations on race outcomes and these expectations should be reflected in the stock market prices. According to efficient markets theory only unanticipated news about team performance could have an effect on the stock market. The FIA regulations require that “at each Grand Prix meeting all race drivers may participate in two one and a half-hour practice sessions on Friday (Thursday at Monaco)” and these free practice sessions take place from 10.00 to 11.30 and from 14.00 to 15.30 (see Formula1.com). As the racing teams who were dominating the first free practices mostly won the race on Sunday, it could be argued that the information on the practice sessions from all European races and -still

308   Schredelseker and Fidahic

more- from the Asian races should already be incorporated in the share price on Friday, so the expected effect in the event-window would be reduced. We wanted to draw the reader’s attention to this possible anticipation effect, but, unfortunately, the small number of observations does us not allow a further investigation. To complete an event study it has to be defined what “abnormal returns” should be. In general terms, abnormal changes in the market value of firms are measured by benchmarking the stock return around the event with the normal return that would be expected if the event had not taken place; usually as proxy of such a normal return the market return in the time span given is taken. For any racing team the Grand Prix on Sunday indicates an event if the team’s car took part in the race. In direct comparison between two rival teams a possible race outcome may be either a “win” or a “non-win” (or “loss”). As we are interested in studying the impact of the Formula One races on the stock prices of the related companies, we decided to consider the points in the constructors’ and not in the drivers’ world championship, even if in the public the drivers’ championship may stand out more; for the teams the constructors’ championship is much more meaningful and provides quite a lot of prestige: being the best constructor in the field demonstrates a direct connection to the team and furthermore to the brand which stands behind it. As the FIA scores (1st: 10 points; 2nd: 8; 3rd: 6; 4th: 5; 5th: 4; 6th: 3; 7th: 2; 8th: 1) apply for both the drivers’ and the constructors’ world championship, in most cases there was no difference in between the two options; in six cases, however, this was the case. Twice both teams teams achieved the same number of points and the one with the best driver was appointed as winning team. Three times it happened that the team of the race-winner had less points as its opponent who was counted as team-winner. As already mentioned, our database consists of daily returns of the Italian firm Fiat, owning Ferrari, the Germany-based company DaimlerChrysler, featuring the team McLaren-Mercedes, and the French car maker Renault, holding the team Renault F1. Since all three firms are European, the daily return of the Eurostoxx50 index is used as a benchmark. Firstly, as shown in the example of Fiat’s share prices during the last race of the analysis (see Table 1), the raw returns are calculated by dividing the closing price of Tuesday (23.04) by the closing price of Friday (22.85). The result is the compound return of 0.83%:

Subtracting from Fiat’s return the return on Eurostoxx50 (-0.75%) we get an abnormal return of 1.58%. Those abnormal returns are summed and constitute the core data in our study; they show whether returns of the firm’s stock are related to the event, in our case the Grand Prix. The stock price dataset was obtained from finance. yahoo.com. The normal close price and its continuous compounding was used for calculations. It is important that the daily prices employed in event studies are generally “closing” prices. In other words, the prices of securities represent the last transaction in regarding securities occurred during the trading day (see MacKinlay, 1997, p. 38). All racing results were acquired from the official Formula One website “Formula1.com” and backed up by the independent website www.f1-report.eu.

Results In the 2005 season, in 18 out of 19 races the winner drove either a Renault or a McLaren-Mercedes. The only exception was the US Grand Prix in Indianapolis, where seven teams withdrew after the formation lap on tire-related safety grounds; the race was won by Schumacher with Ferrari, causing an abnormal return of an outstanding 4.69% (!) for the share price of Fiat. Table 2 shows the winners from the 2005 season with the corresponding movements in the capital market. Each line represents one Grand Prix. On the left hand there are the points which are gained by both drivers for their corresponding team (MCL for McLaren-Mercedes, REN for Renault and FER for Ferrari), whereas on the right hand, there are the share price data: in the center the return on the benchmark “Stoxx” (for EuroStoxx50), at the left and at the right, in mirrored order, the return on the shares from the two competing teams. DAI, RNO and FIAT are the stock exchange symbols of DaimlerChrysler, Renault and Fiat respectively, while “Abn.R” stands for abnormal return. At first view McLaren-Mercedes generates for the share price of DaimlerChrysler +0.76% after wins and -0.01% after losses. Compared with the EuroStoxx50 as benchmark, McLaren-Mercedes scores +0.46% after wins and ±0.00% after losses. In contrast, Renault achieves +0.13% after wins and +0.94% after losses for its share price. Compared with the benchmark, the outcome is +0.14% after wins and +0.64% after losses. A first observation is that independently from race outcomes both teams on average effectuate positive share price

Table 1  Fiat’s Share Prices During the Last Race of the Analysis

Date

FIAT Close

Friday

10/19/07

22.85

4411.26

Monday

10/22/07

22.32

4356.24

Tuesday

10/23/07

23.04

Day

FIAT Return

0.83%

STOXX Close

4378.42

STOXX Return

FIAT Abn. return

-0.75%

1.58%

Stock Market Reactions and Formula One Performance   309

Table 2  Results From the 2005 Formula One World Championship Points

Daimler

Renault

GP

Date

MCL

REN

Winner

Abn.R

DAI

Stoxx

RNO

Abn.R

1

03/06/05

4

16

Renault

0.13%

-0.17%

-0.31%

1.02%

1.33%

2

03/20/05

5

10

Renault

0.75%

0.65%

-0.10%

0.29%

0.40%

3

04/03/05

6

10

Renault

0.31%

0.41%

0.10%

2.35%

2.26%

4

04/24/05

0

10

Renault

-0.26%

-0.03%

0.23%

0.00%

-0.23%

5

05/08/05

12

12

McLaren

-0.54%

-1.73%

-1.19%

1.71%

2.90%

6

05/22/05

14

5

McLaren

-1.33%

-0.80%

0.53%

-1.22%

-1.75%

7

05/29/05

2

13

Renault

1.10%

0.86%

-0.24%

0.00%

0.24%

8

06/12/05

10

0

McLaren

0.13%

0.73%

0.60%

-0.72%

-1.32%

9

06/19/05

-

-

Ferrari

10

07/03/05

8

13

Renault

-0.63%

-0.65%

-0.02%

-0.89%

-0.87%

11

07/10/05

16

13

McLaren

0.11%

0.48%

0.36%

1.03%

0.66%

12

07/24/05

8

15

Renault

-0.14%

0.17%

0.31%

-0.79%

-1.10%

13

07/31/05

10

0

McLaren

2.73%

3.43%

0.70%

3.19%

2.49%

14

08/21/05

16

13

McLaren

0.80%

-0.07%

-0.87%

-0.60%

0.27%

15

09/04/05

15

14

McLaren

0.84%

2.87%

2.04%

2.74%

0.70%

16

09/11/05

10

8

McLaren

-1.52%

-2.54%

-1.02%

-0.82%

0.20%

17

09/25/05

18

10

McLaren

2.90%

4.47%

1.57%

3.16%

1.59%

18

10/09/05

10

14

Renault

-2.00%

-1.61%

0.40%

-0.19%

-0.59%

19

10/16/05

8

15

Renault

0.70%

0.26%

-0.44%

-0.66%

-0.22%

Total return after wins:

4.13%

6.84%

1.13%

1.22%

Total return after “losses”:

-0.03%

-0.12%

8.46%

5.75%

Average return after wins:

0.46%

0.76%

0.13%

0.14%

Average return after “losses”:

0.00%

-0.01%

0.94%

0.64%

Significance (2-tailed):

0,458

reactions on the capital market. However, the results are statistically not significant; a high significance could not been expected, because of the small number of data (18 regular races in 2005). Two caveats have to be mentioned: First, in the Spanish Grand Prix on May 5th, 2005 both teams actually achieved 12 points (1st and 7th place to McLarenMercedes and 2nd and 5th place to Renault); because McLaren-Mercedes could claim the winner Räikkönen, the German-based team was considered the winning team. Second, in the Japanese Grand Prix on October 9th, 2005 in Japan the winning driver was newly Räikkönen in a “Silver Arrow”, but Renault scored 14 points with the second and third place and was considered the winning team. The 2006 season proceeded in a similar way, only with Ferrari and McLaren-Mercedes switching places.

0,438

Just the Hungarian Grand Prix on August 6th, 2006 was won by Jenson Button on Honda; as in this race Ferrari at least scored more points than McLaren-Mercedes, Fiat-Ferrari has been considered to be the winning team (with respect to its opponent) of that weekend. In the Chinese Grand Prix on October 1, 2006, Schumacher has won the race on Ferrari, but the two Renault drivers (2nd and 3rd place) as team were still more successful with 14 points overall. On the whole, compared with the EuroStoxx50, the abnormal returns of Fiat’s share price in Table 3 are +0.35% after wins of Ferrari and +0.97% after losses. Conversely, the returns for Renault are -0.63% after wins and +1.12% after losses. In the 2007 season all races were carried out between Ferrari and McLaren-Mercedes. In three races of this season there was a difference between the winning driver

310   Schredelseker and Fidahic

Table 3  Results From the 2006 Formula One World Championship Points

Fiat

Renault

GP

Date

FER

REN

Winner

Abn.R

FIAT

Stoxx

RNO

Abn.R

1

03/12/06

8

10

Renault

0.95%

1.87%

0.92%

1.28%

0.37%

2

03/19/06

7

18

Renault

4.21%

4.62%

0.41%

1.13%

0.72%

3

04/02/06

0

14

Renault

2.47%

2.38%

-0.09%

-0.29%

-0.19%

4

04/23/06

15

9

Ferrari

1.25%

0.81%

-0.45%

7.21%

7.65%

5

05/07/06

16

11

Ferrari

0.18%

0.61%

0.43%

3.54%

3.11%

6

05/14/06

13

16

Renault

-4.87%

-5.41%

-0.54%

-3.77%

-3.23%

7

05/28/06

4

13

Renault

3.67%

0.68%

-2.99%

-2.20%

0.79%

8

06/11/06

12

15

Renault

0.08%

-3.18%

-3.26%

-3.73%

-0.47%

9

06/25/06

12

15

Renault

1.13%

-0.10%

-1.22%

-3.41%

-2.18%

10

07/02/06

18

10

Ferrari

-1.17%

-0.58%

0.60%

-1.56%

-2.16%

11

07/16/06

16

11

Ferrari

-1.05%

-1.51%

-0.46%

-0.31%

0.15%

12

07/30/06

18

7

Ferrari

1.54%

-0.36%

-1.90%

-0.93%

0.97%

13

08/06/06

3

0

Ferrari

1,26%

-0.09%

-1.35%

-1.93%

-0.58%

14

08/27/06

16

11

Ferrari

0.84%

1.51%

0.68%

-0.17%

-0.84%

15

09/10/06

10

5

Ferrari

1.20%

2.23%

1.03%

1.85%

0.82%

16

10/01/06

10

14

Renault

1.52%

1.03%

-0.50%

-2.07%

-1.57%

17

10/08/06

8

16

Renault

-0.44%

0.08%

0.52%

0.61%

0.09%

18

10/22/06

15

11

Ferrari

-0.90%

-0.51%

0.39%

1.33%

0.93%

Total return after wins:

3.15%

2.11%

-12.44%

-5.68%

Total return after “losses”:

8.72%

1.97%

9.02%

10.06%

Average return after wins:

0.35%

0.23%

-1.38%

-0.63%

Average return after “losses”:

0.97%

0.22%

1.00%

1.12%

Significance (2-tailed):

0,531

and his team. This was the case in the Australian Grand Prix on March 3rd, 2007 where Räikkönen has won on Ferrari, but the two “Silver Arrows” (2nd and 3rd place) gained more points for the team McLaren-Mercedes. The same happened in the Spanish Grand Prix on May 13th, 2007: Massa on Ferrari has won the race, but McLaren-Mercedes was the winning team with its 2nd and 3rd place. In the British Grand Prix in Silverstone on July 8th, 2007 the two Ferrari drivers got 14 points (1st and 5th place), as much as McLaren-Mercedes with their 2nd and 3rd places; with Räikkönen on Ferrari as winner of the race, Fiat-Ferrari has been considered to be the winning team. According to the outcomes in Table 4, the Italian manufacturer generates an average return of +0.79% after wins and +0.17% after losses for the share price. Compared with the Eurostoxx50 benchmark, the average abnormal return amounts to +0.88% after wins

0,119

and –0.41% after losses. McLaren-Mercedes achieves positive results of +1.52% after wins and +0.11% after losses for the share price of the German company. After the benchmark comparison, McLaren-Mercedes scores abnormal returns of +0.93% after wins and +0.19% after losses.

Conclusion The Formula One seasons 2005–2007 have shown a specific peculiarity which occurred never before (and probably will not occur easily in the future): in each of these three years the championship was basically a fight between two out of three teams: Fiat-Ferrari, Renault and McLaren-Mercedes-Benz. Each of these teams had a strong relationship to a large European motorcar producer, each of whom is listed at at least one European stock exchange. This historical uniqueness allowed us

Stock Market Reactions and Formula One Performance   311

Table 4  Results From the 2007 Formula One World Championship Points

Fiat

Daimler

GP

Date

FER

MCL

Winner

Abn.R

FIAT

Stoxx

DAI

Abn.R

1

03/18/07

13

14

McLaren

-0.24%

2.11%

2.36%

5.04%

2.68%

2

04/08/07

10

18

McLaren

-0.23%

0.47%

0.70%

3.49%

2.80%

3

04/15/07

16

12

Ferrari

0.29%

1.83%

1.54%

0.56%

-0.98%

4

05/13/07

10

14

McLaren

0.75%

1.15%

0.41%

4.72%

4.32%

5

05/27/07

7

18

McLaren

2.16%

2.66%

0.50%

0.18%

-0.32%

6

06/10/07

4

12

McLaren

1.09%

1.24%

0.15%

2.33%

2.18%

7

06/17/07

11

18

McLaren

2.20%

1.68%

-0.52%

-0.32%

0.20%

8

07/01/07

18

8

Ferrari

2.74%

3.25%

0.52%

0.03%

-0.49%

9

07/08/07

14

14

Ferrari

0.69%

-0.43%

-1.12%

0.20%

1.32%

10

07/22/07

8

10

McLaren

-2.03%

-2.78%

-0.75%

0.96%

1.71%

11

08/05/07

8

15

McLaren

-4.35%

-3.23%

1.12%

-2.48%

-3.60%

12

08/26/07

18

10

Ferrari

0.72%

-0.90%

-1.62%

-0.62%

1.00%

13

09/09/07

6

18

McLaren

-1.78%

-0.95%

0.84%

-1.72%

-2.56%

14

09/16/07

18

11

Ferrari

-1.70%

-0.68%

1.02%

0.91%

-0.10%

15

09/30/07

9

10

McLaren

-1.64%

-0.61%

1.03%

2.96%

1.93%

16

10/07/07

16

8

Ferrari

1.83%

1.66%

-0.17%

0.57%

0.75%

17

10/21/07

18

8

Ferrari

1.58%

0.83%

-0.75%

-0.90%

-0.15%

Total return after wins:

6.15%

5.56%

15.16%

9.34%

Total return after “losses”:

-4.07%

1.74%

0.76%

1.35%

Average return after wins:

0.88%

0.79%

1.52%

0.93%

Average return after “losses”:

-0.41%

0.17%

0.11%

0.19%

Significance (2-tailed):

to carry out an “event-study”, a widespread technique known from empirical finance. This allowed us to shed some light on the sponsoring effectiveness of motor-car racing investigating the stock price movements around any Formula One Grand Prix in these three years. We know that, given the thin database (about 17/18 races per year), we cannot expect to deliver results satisfying rigorous statistical significance criteria. But we know that better data than those we had from the years 2005–2007 probably will very hardly be available in the future. So we decided to accomplish our study even if we have to admit doubts on its validity in a rigorous statistical sense. Given the thin database we did not execute multivariate regression techniques, knowing that their results would be far away form any serious kind of reliability; we accept the critics that beside our assumed drivers their could be others; given the fact, that there are not more than 18 races per year, we have no chance to counter these critics.

0,176

0,465

The basic results: On average a “win” by McLarenMercedes yielded an abnormal return of 70 basis points (BP) for the DaimlerChrysler stock in the seasons 2005 and 2007, whereas in the case of a “loss” the share price went up only 9 BP. Similarly, for 2006 and 2007, the market price of Fiat increased on average for 62 BP when Ferrari has won and and for 28 BP when Ferrari has lost. In both cases the public attendance of the Grand Prix had a positive impact on the valuation of the company’s stock and in the case of “wins” this effect was considerably higher than in the case of “losses”. Different results we got for Renault: in 2005 and 2006, both years in which Renault has won the drivers’ championship as well as the constructors’ championship, in the case of a “win” the Renault share price dropped for 24 BP, whereas in the case of a “loss” it increased for 88 BP. Compounded the public attendance in the days of a Grand Prix had a positive impact for Renault too, but the negative reaction on wins and the positive reaction on losses is struggling.

312   Schredelseker and Fidahic

One explanation for the differences between the racing teams might be the traditional association of the manufacturing companies with Formula One and with motor sports in general. Out of the three carmakers Fiat seems to be making the best investment; because of the attractiveness of the Italian company for external sponsors, Fiat itself has to invest only a small amount of money and, nevertheless, probably receives the best results in the capital market. The involvement and permanent exposure in the Formula One circus of Daimler, too, seems to pay off: no matter whether the race outcome is positive or negative, there is an improvement in the firm’s market valuation. For Renault, instead, a conclusion cannot be drawn from the results obtained: on the one hand, on average there was a positive abnormal return on all Grand Prix taken together, on the other hand we observed reversed results: Renault’s race performance is negatively correlated with the stock market response. The French carmaker is not as much a traditional Formula One team as it is Ferrari or Mercedes-Benz. Ferrari and Mercedes have been in the Formula One circus from its very beginning in the fifties: the first world championship on Ferrari was won by Alberto Ascari in 1952, the first on a Mercedes-Benz by Juan Manuel Fangio in 1954, whereas Renault joined the club of champions in a Williams team, thus only as an engine provider, when Nigel Mansell became world champion in 1992 (Renault’s first appearance as a team was in 2002).

Besides Formula One sport, there has to be made another observation. Ferrari is the incarnation of a sports car and participating in Formula One is a central and integrated element in the corporate philosophy of the Italian carmaker and hence its parent company Fiat. By tendancy, the same is true for Mercedes-Benz: since the fifties the legendary SL-type is one of the most appreciated sports car in the world and Mercedes has always been actively engaged in high class motor sports (even if from 1955 to 1994 not in the Formula One). Renault, instead, is rather known for good every-day cars, having a high standard of economic effectiveness, of reliabilty and safeness, but nothing special what qualifies them as “sportive”. Our results suggest that the capital market is aware of that and appreciates the participance of Fiat-Ferrari and McLaren-Mercedes in the Formula One, whereas the efforts of Renault are less (or even not at all) rewarded. This finding is consistent with Mahar et al. (2004) who observe a stronger relationship between the sponsoring company and the racing team, when there is a logical match between real activity and emotional appearance.

Appendix Comparison between two-trading-days-event-windows (Friday to Tuesday) and one-trading-day-event-windows (Friday to Monday):

Appendix 2005

2006

2007

DAI

REN

FIAT

REN

FIAT

DAI

. . . after wins

0.46%

0.14%

0.35%

-0.63%

0.88%

0.93%

. . . after losses

0.00%

0.64%

0.97%

1.12%

-0.41%

0.19%

. . . after wins

0.52%

-0.32%

0.57%

0.00%

0.32%

0.52%

. . . after losses

0.09%

0.70%

1.04%

0.22%

0.23%

-0.20%

Two-days-window Average abnormal returns

One-day-window Average abnormal returns

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Stock Market Reactions and Formula One Performance   313

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