LONDON – Argentina and Germany face off in the World Cup final on Sunday and investors in both countries will do well to be alert to potential drops on their stock markets the day after in case of defeat.
With markets driven by sentiment as well as fundamental factors such as growth, dividend payments and inflation, a big sporting defeat can depress the mood of traders and cause the stock market to underperform.
Alex Edmans, a professor at London Business School and the Wharton School of the University of Pennsylvania, has assessed the impact of major sporting events on market behavior for years and his analysis of this World Cup has confirmed that defeats have generally resulted in declines the day after that are greater than, or counter, to the performance of the wider global market.
The efficient markets hypothesis argues that stock prices depend only on fundamentals, Edmans said. That would be true if traders were robots. But, traders are human beings and they’re affected by emotions.
Across all countries with a developed stock market index, Edmans has found that defeat in the World Cup led to the national index underperforming the main world market index, the MSCI, by 0.2 percentage points. The average losses experienced in many of the soccer-crazy countries – especially England, Italy and Spain – were met with bigger declines of some 0.6 percentage points.
That was particularly notable for defending world champion Spain after its 5-1 demolition by the Netherlands in their opening match. Spain’s market fell by 1 percent the following day as opposed to the 0.1 percent gain in the world market. Italy saw its main market slide 1.5 percent on a day when the world market index was flat, after the Azzurri lost 1-0 to Costa Rica, putting the team’s qualification for the second round in doubt.
In total, Edmans found that 25 of the 37 defeats he analyzed triggered market underperformance. Most recently, the Netherlands’ main stock market fell 1 percent faster than the world market after its defeat on penalties to Argentina in the semifinal on Wednesday.
The results appear consistent with the findings of a study published in 2007 in the Journal of Finance that Edmans co-authored with Diego Garcia of the University of North Carolina and Oyvind Norli from the Norwegian School of Management.
It analyzed 1,100 soccer games from 1973 to 2004 and found that a loss in the elimination stages of the World Cup led to the national market falling around 0.5 percent the next day.