Effect of Team Performance On Sports Franchise Valuation: Evidence From MLB, NBA, and NFL

The economic value of media rights, merchandise sales, ticket and luxury suites sales, advertising, and licensed products and other royalties for sports franchises is substantial.  Revenue increases in any of the mentioned sources above can have a positive effect on the overall revenue and earnings of a sports franchise, which may lead to an increase in franchise value. Like other business enterprises, publicly traded or privately held, sports franchises can be valued by using discounted cash flow (DCF) models. Summing the present value of future cash flows to be derived from certain assets would give an estimate of the fair market value of a sports franchise. When building a DCF model to assess the fair market value of any firm, it is critical to understand certain factors, including the operations, revenue, profit, and cost drivers of the subject company, the industry in which the company operates, risk factors, and economic landscape. In valuing sports franchises, one of the major factors driving revenue, earnings, and profitability of a sports franchise is the performance of the sports team.

In a working paper to be released soon, we examined the impact of team performance on overall franchise value. This impact is driven by the major sources of a sports franchise’s revenue and cash flows, including merchandise sales, ticket and luxury suites sales, advertising, and licensed products and other royalties.  A potential caveat in this kind of analysis arises from the fact that sports franchise values are highly dependent on intangible assets, including media rights deals, which may be negotiated at the team-level or on the league-level, as in the National Football League (NFL). In addition, almost all sports franchises are privately held corporations who do not report their financial and operational data publicly.  Our franchise value analyses were based on financial and operational data and estimates reported by the Forbes magazine and other reliable media sources, as well as team performance data reported by national sports leagues subject to our analysis.

The determinants of sports franchise value have been analyzed in various economic studies over the last couple of decades.  The effect of team performance on franchise value has been a part of some of those studies, however, it was never the main focus. Among the most important determinants of franchise value are metropolitan area characteristics, such as population, and personal income; team characteristics, such as fan base of a team, and the presence of star athletes; and venue characteristics, such as ownership status, cost of attending a game (fan cost), and age of the stadium. Unlike previous studies, we introduced our own performance index, which is a measure of a team’s performance by assigning different numbers for different level of success during a season, e.g., going to playoffs, conference final, and winning the national championship, rather than a flat win percentage. The index takes into account teams’ performance during the regular season (as division wins) and/or playoff appearances, conference wins, as well as national championships. Our data set is divided into three panels of the major teams in the Major League Baseball (MLB), National Basketball Association (NBA), and National Football League (NFL) over the period 1990-2008.

Our study extended the recent research on the determinants of franchise value in the U.S., with an emphasis on the effect of performance on team revenue and franchise value. We used previous research, as well as our economic reasoning, as a guide in helping us narrow down franchise value determinants in our regression models for the MLB, NBA, and NFL. We divided our independent variables into three groups: metropolitan area characteristics, stadium appeal factors, and team appeal factors, including team performance. Team appeal factors were the primary focus of our study and their results were the most consistent between leagues. We used team payroll as a proxy for the presence of star athletes which is one of the main drivers of appealing fans to the games, especially during the regular seasons. We found strong evidence of a positive effect of salaries on team revenue and franchise value in the MLB. The NBA had negative coefficients for salaries in the regression in which the dependent variable is total revenue, although the salaries variable in the NBA regression models are not statistically significant.

The results for team performance, which is measured using our index, were met with our expectations. Contemporaneous performance had a positive effect on team revenue and franchise value in both NBA and MLB. This result indicates that as a team improves its performance it attracts more fans, increase its ticket prices, and increases revenue, which leads to an increase in franchise value. Our models did not generate meaningful or statistically significant results for the NFL. Similar to the previous studies, we found that the performance is not statistically significant in the regression models of revenue, gate receipts or franchise value for the NFL. The main plausible explanation for this is that the NFL teams rely heavily on media deals as a source of revenue, which on average account for about 60 percent of the total revenue. The NFL’s reliance on media deals as a main source of revenue as well as its gate receipts-sharing system, in which the home team shares gate receipts with the visiting team, dilutes the effect of performance on revenue and franchise value.