Financial Risk Management

Abstract

One of the absolutes in professional sports, and a reason for its success, is the uncertainty of the outcome of individual games, seasons, and championships. This uncertainty impacts a team’s attendance and financial operation. While leagues cultivate uncertainty through various rules such as salary caps, revenue sharing, and the amateur draft, individual franchises have to manage the result of variability in annual revenues. Not only is this due to the parity in a league but also from injuries and changes in player quality that are unexpected. Whether uncertainty or winning or the perfect combination of the two, some aspects that affect revenues can be controlled by team management more so than others. Even though on-the-field success is not easily controlled by team management, the overall quality of the experience can be impacted from, among other things, a quality stadium with comfortable seating and delectable food. This research shows that the variability in annual team revenues decreases (relative to total revenues) once a team moves into a new stadium, all else equal. The increase in predictability lowers financial risk, impacting the cost of financing and other practical operational issues like game-day staffing.