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The Rate of Return on Sports Franchises

2008 March 2
by Brad Humphreys

Over on Newmark’s Door, economist Craig Newmark discusses a recent New York Times article by Joe Nocera about why bad team owners want to own professional sports teams. Both the Nocera article and Newmark’s comments make for interesting reading. The argument comes down to this: Nocera claims that even bad owners of lousy teams make big money from capital gains when they sell the team; Newmark points out that the rate of return in Nocera’s example (prototypical bad owner Donald T. Sterling bought the LA Clippers for $13.5 million in 1981 and the franchise is now worth about $300 million according to the most recent Forbes estimates) are not that great in the context of the stock market.

I want to add a couple of points to this debate:

  1. They both mention operating losses claimed by pro sports teams. These must be taken with a grain of salt, if not treated as complete fabrications. It has been more than ten years since Paul Beeston’s famous quote: “Anyone who quotes profits of a baseball club is missing the point. Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss and I could get every national accounting firm to agree with me.” Both of them should know better than to pay any attention to claims of operating losses, until hard evidence proves otherwise.
  2. They both argue about the Forbes franchise value estimates that come out every year. These estimates are consistently lower than the actual sales prices of franchises.

Several of us here at the Sports Economist have published recent papers on sports franchise values. Rod Fort’s 2006 paper in the International Journal of Sport Finance and Phil Miller’s 2007 paper in the Journal of Sports Economics jump immediately to mind. Both these papers focus on MLB, and the Miller paper uses the Forbes franchise estimates. For what it’s worth, Mike Mondello and I have a new paper coming out in the next International Journal of Sport Finance that analyzes franchise sale prices over the past 38 years. We find that the rate of return on the average sports franchise, adjusted for changes in quality, was about 16% over the period 1969-2006. That is well above the 10.56% rate of return on the S&P 500 with dividend reinvestment over that period that the Political Calculations web tool spits out. So on average, all sports team owners were making a hefty rate of return on their investments.

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