Evgeny Lyandres Wins Pearson Prize for Best Paper in Financial Management
Bernile, G., & Lyandres, E. (2011). Understanding investor sentiment: The case of soccer. Financial Management, 40(2), 357-380.
Do investors hold biased expectations or have emotional reactions to events that in turn lead to inefficiencies in the stock market, such as a disparity between real and perceived value? Can the answer be found in soccer?
A recent award-winning paper by Gennaro Bernile and Evgeny Lyandres takes a sample of publicly traded European soccer clubs, analyzes their returns around important matches, and extrapolates outwards to the stock market at large, assessing the effect that investors’ biased expectations and irrational reactions have on the efficiency of stock prices.
Bernile is an assistant professor in finance at the School of Business, University of Miami, Coral Gables; Lyandres is an associate professor in finance at Boston University School of Management. Their paper, “Understanding Investor Sentiment: The Case of Soccer,” appeared in Summer 2011 in the journal Financial Management and was awarded First Place among the Pearson Prizes for the Best Papers in Financial Management, awarded by the Financial Management Association International and Pearson.
Using a Novel Proxy for Investor Expectations
In their award-winning study, the authors note that soccer provides a uniquely useful model for analyzing ex ante (pre-event) optimism and ex post (post-event) emotional reactions because sport results are frequent, value-relevant, and easily quantifiable, leading to observable expectations and reactions on the part of both fans and investors. Moreover, unlike many traditional corporate finance settings, the results of sporting events cannot be manipulated by firm insiders, inoculating the market outcome from investor fears around potential manipulation.
Within the context of soccer club investment, the authors uncover a unique proxy for investors’ expectations: contracts traded on betting exchanges, or prediction markets, a measure of investor expectations that has not been used before in published academic research. By analyzing these contracts, they find that a systematic bias in investors’ expectations before games leads to inefficient investment. “Investors are overly optimistic about their teams’ prospects pre-event,” they write,” and, on average, end up disappointed post-event, leading to negative postgame abnormal returns,” or a mean stock return of -0.9% on the days following important soccer matches.
Insights for Firms’ Investment Decisions, Control Transactions
This research offers important insights for corporate investment decisions and control transactions well beyond those involving public sports franchises. Its findings hold particular relevance for firms’ value-relevant actions, such as long-term investments and effort exertion, dependent on the efficiency of ex-ante and ex-post stock prices. “Our evidence indicates that preevent stock prices are inefficient,” the authors conclude, but that postevent prices may be efficient.
Access the abstract or full article at Financial Management online.