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Are Corporate Sponsorships Worth It? Investors Say No

Unless a company is backing a philanthropic event, U.S. investors tend to be unhappy with corporate sponsorships.

(originally published by Booz & Company)

Bottom LineDespite an increase in corporate sponsorships, investors react negatively to news that a company has attached its name and financial support to another organization or event. Only support for good causes consistently earns shareholders’ approval.

As the 2014 Winter Olympics in Sochi wind down, the sport of number-crunching is having its day in the spotlight. Companies spent as much as US$100 million each to become exclusive sponsors of the 2014 Games, despite the many controversies swirling around Russia’s socioeconomics. Clearly, leading corporations still believe an association with high-profile events can develop brand awareness among consumers more effectively than a traditional, less costly advertising campaign. But a new study warns that shareholders, especially in the United States, take a decidedly dim view of corporate sponsorships—unless the funding underwrites a philanthropic cause, nonprofit organization, community event, or one-of-a-kind occasion.

Worldwide spending on sponsorships has skyrocketed over the past three decades, from $2 billion in 1984 (when the Olympics came to Los Angeles and introduced the concept on a large scale) to $48.6 billion in 2011. The one-off, philanthropic donations of the past have been eclipsed by complex agreements that bind a company and its partner to a long-term, reciprocal relationship. But researchers have failed to establish whether companies actually reap the “added value” that’s promised when they open their checkbooks, lend their names, and seek to burnish their image by association.

For this paper, the authors analyzed the market’s reaction to nearly 300 sponsorship announcements made in 2010 by large companies listed on 24 stock exchanges. They examined 13 variables that could help explain investors’ responses, generating the broadest data set ever used to examine shareholders’ opinions of corporate sponsorships.

The authors analyzed firms’ abnormal returns—or the unexpected movement in stock price compared with the prices of the preceding months—in the two days following the sponsorship announcement, as well as the subsequent impact on analysts’ forecasts. After controlling for other factors that could influence returns, the authors uncovered a consistent pattern: Firms’ stock prices dropped significantly after they announced a commercial sponsorship, reflecting shareholders’ deep unease over an outlay that could prove expensive, distracting, or controversial.

Indeed, sponsorship fees are just the tip of the iceberg. When a firm decides to become a benefactor, it also spends heavily on promotional materials, customized product designs, and special events in order to emphasize the partnership. “Because sponsorship incurs additional expenses, it conceivably could reduce profits even as it improves brand equity,” the authors write.

Clearly, shareholders would rather see their companies employ straightforward advertising campaigns, celebrity endorsements, or viral marketing. Investors also worry that consumers might pay more attention to the event, or be caught up in its emotions, and all but ignore the corporate logos emblazoned on signs, screens, and billboards. Similarly, high-profile events often have many different sponsors, making it hard for individual brands to stand out.

And although large-scale partnerships are designed to help companies reach a broader population, the authors found that investors don’t really care about the type or size of the audience attracted by the sponsorship. This is perhaps linked to the rise of social media, and the idea that any company, anywhere, can reach consumers through a smartphone or Flash ad—even those sitting in the stands of an “exclusively sponsored” event.

Previous studies have suggested that high-tech firms typically derive more positive benefits from sponsorship deals—hence the rise in the number of arenas bearing the name of up-and-coming companies that many people haven’t heard of. But this paper uncovered no such evidence. As the high-tech sector has matured, the authors suggest, financial analysts no longer view pricey marketing plays such as sponsorship announcements as an automatic signal that nascent firms have “made it.”

However, investors did react positively when their company sponsored a distinctive event or a charitable campaign. This implies that shareholders do value sponsorships when they can justify the expense because it’s going to a philanthropic or unique cause, or when they expect some good karma to rub off on the company’s reputation. They could also view this type of patronage as a sign that managers are embracing corporate social responsibility at a time when, according to many analysts, “only companies that make sustainability a goal will achieve competitive advantage.”

Shareholders do value sponsorships when they can justify the expense.

But overall, the authors advise managers to downplay their sponsorships announcements, especially when shareholders might react negatively to the deal because of its price tag or partner. For example, sponsors of the 2014 Winter Olympics have faced criticism from civil rights activists, earning headlines for all the wrong reasons.

And shareholders in the United States are particularly pessimistic about the value of sponsorships, reacting far more negatively to announcements than investors in other parts of the world. The authors posit that because the U.S. hosts so many professional sports leagues, entertainment venues, and national events—each of them swarming with sponsors—shareholders are skeptical that an individual message can cut through all the chatter.
“In this saturated environment, each sponsor struggles to attract consumers’ and investors’ attention,” the authors write. “Overall, this result suggests that investors may perceive sponsorships as overused and overrated in the United States.”

Source: Are Sponsorship Announcements Good News for the Shareholders? Evidence from International Stock Exchanges, Marc Mazodier (University of South Australia) and Amir Rezaee (ISG Business School), Journal of the Academy of Marketing Science, Sept. 2013, vol. 41, no. 5

Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

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