After a disappointing 2014 World Cup, the nation is eagerly awaiting the start of Euro 2016. With a 100 per cent record in the qualifiers, and currently priced at 8/1 fourth favourites, England are quietly confident that they can at least emulate their semi-final appearance 20 years ago.
But it shouldn’t only be football fanatics cheering England on. Stock market investors have an interest in their success too. Because three decades of data, spanning over 1,000 international football matches, show that football results have a significant effect on the stock market.
How can this be? Football results have negligible effects on inflation, unemployment, and dividends, so a rational stock market should ignore them. But the key words are “a rational stock market”. A vast literature on behavioural finance, championed most notably by Nobel Prize winner Bob Shiller, has found substantial evidence that the stock market is irrational.
This irrationality arises because traders aren’t computers, who dispassionately analyse a firm’s fundamentals in a vacuum. They’re humans who are affected by emotions. If a boss’s house was flooded the day before she evaluates her subordinate, she’s likely to give a more negative evaluation simply due to her mood. Similarly, if investors are depressed, they may value companies less positively, even if their fundamentals are unchanged.
And one of the largest drivers of national mood is sporting performance. When England lost to Argentina in the 1998 World Cup, heart attacks increased over the next few days. Suicides rise in Canada when the Montreal ice hockey team loses in the Stanley Cup, and murders go up when the local American Football team loses in the playoffs.
Indeed, professors Diego Garcia, Oyvind Norli, and I studied the effect of international football matches in 39 countries in our paper Sports Sentiment and Stock Returns. We found that being eliminated from the World Cup leads to the national market falling by 0.5 per cent on the next day – controlling for everything else that might drive stock returns. Applied to the UK, that’s £10bn wiped off the market in a single day.
For a regional tournament such as the Euros, it’s 0.3 per cent or £6bn. The effect is stronger in the elimination stages than the group stages, because if you lose you’re instantly out, and stronger in football-crazy countries, such as England, France, Germany, Spain, Italy, Argentina and Brazil. We ruled out the explanation that the market declines are due to the economic effects of losses (e.g. reduced sales of replica merchandise, or reduced worker productivity).
I wrote a similar article in City A.M. on the eve of the 2014 World Cup warning of the potential negative effects of a major defeat. How did this prediction end up panning out? Two-thirds of losses in games were followed by the national market underperforming the world market – significantly higher than the half you would expect if it were random. Some notable losses were:
- Spain 1-5 Holland. The Spanish market fell by 1 per cent the next day, while the world market went up by 0.1 per cent. This was a crushing defeat for the reigning world champions.
- England 1-2 Italy. The English market fell by 0.4 per cent, while the world market was flat.
- Italy 0-1 Costa Rica. The Italian market fell by 1.5 per cent after the biggest shock of the World Cup so far, while the world market was flat.
- Italy 0-1 Uruguay. The Italian market fell by 0.5 per cent after their group-stage elimination, while the world market was flat.
- France 0-1 Germany. The French market fell by 1.4 per cent after their quarter-final elimination, while the world market fell 0.5 per cent.
- Holland 0-0 Argentina (2-4 on penalties). The Dutch market fell by 1.7 per cent after their semi-final elimination, while the world market fell only 0.7 per cent.
But there was one big outlier. After Brazil’s 7-1 humiliation at the hands of Germany, the stock market rose 1.8 per cent. Surely this disproves the theory?
Actually, there’s a twist – the market rose because the defeat was so bad that investors hoped that it increased the chances that President Dilma Rousseff would be ousted in October’s elections. Her popularity was particularly tied to the football team because she chose to spend billions on stadiums for the World Cup instead of keeping her pre-election promises to spend on schools, hospitals, and general infrastructure.
Of course, the stock market’s performance after any one particular defeat may be swayed by other factors, so we should not expect every defeat to be followed by a decline. But the average effect after studying over 1,000 games is clear – football defeats spill over into negative stock market sentiment. So even investors who care nothing for football should be getting behind the Three Lions from tomorrow.
Alex Edmans is professor of finance at London Business School and an associate at Oxera. A review of the stock market effect of the 2014 World Cup is at http://alexedmans.com/2014wc. He will be covering Euro 2016 on Twitter at @aedmans.