Does The House Always Win? Sportsbook Stock Performance When Underdogs Win

Abstract

Just before the 2023 National Collegiate Athletic Association (NCAA) March Madness tournament, Florida Atlantic University had +8,000 odds of reaching the Final Four and +40,000 odds of winning it all (McDermott, 2023). While their Cinderella story was cut short, their presence in the Final Four gave many sportsbooks a run for their money. Few anticipated a 9th seed advancing that far. The consensus in sports betting has long revolved around the phrase, “the house always wins.” However, there have been numerous occasions where underdogs cause massive upsets and sportsbooks publicly claim expensive losses. When publicly traded businesses encounter financial losses, these are often reflected in declining stock prices (Dechow et al., 2014). The uncertainty surrounding the sports betting industry, coupled with major sportsbooks like DraftKings entering the public trading sphere (Cherney, 2020), presents an opportunity to examine how sportsbook stocks perform when underdogs win. Understanding this relationship may also help identify potential investment strategies and inform better regulatory practices on informational transparency in sportsbook reporting. A cross-sectional event study was conducted on the stock prices of two sportsbooks, FanDuel and DraftKings, covering major sporting events since 2018 across eight different competitions in six sports. Abnormal (AR) and Cumulative Abnormal Returns (CAR) were calculated using the Capital Asset Pricing Model. T-tests and analysis of variance were conducted to address the two hypotheses. Results indicated that both hypotheses were rejected, with no significant AR difference between event and nonevent days. Furthermore, both sportsbooks displayed marginally higher CAR following underdog wins than favorites, contrary to the expectation of a negative effect. Rather than reflecting losses, the market response to underdog victories may be modestly positive, and any short-term fluctuations appear to normalize over the days following the sporting event. Furthermore, stratified analyses of the underdog wins suggested that moderate upsets were associated with higher CAR than favorites.