Emotions influence decision-making prowess and cloud your judgement. Investing also brings out a lot of emotions. The emotions related to sports event such as cricket influence the investment decision process.
Recent research published in the Review of Behavioural Finance shows that the outcome of IPL cricket matches affects the prices of sponsors’ stocks.
Moods guide decisions
The team India’s performance in cricket matches also influences the Indian stock markets to a certain extent. The non-economic factors affect the mood of individuals, and such mood swings have an impact on the investment decisions as well.
The recent research from psychology and neurosciences documents the effect of the outcome of sports events on the mood and the self-esteem of fans. People are often optimistic about their judgment because of a positive impact of victory of a favorite sports team on mood, whereas the loss results in pessimism and poor judgment.
As a result, the mood swings of traders eventually affect the stock prices. An investment decision, therefore, not only depends on rationality but the emotional state of the individuals because of the interaction between frontal and temporal lobes in the brain.
Cricket is the most popular game in India, considered often as a religion. The T-20 and the Indian Premier League (IPL) are the gleaming and glowing products of cricket. The IPL is most-watched T-20 league worldwide with a viewer base of more than 730 million.
The emotion attached to cricket is so intense that traders switch their screen to the live match even during the trading hours.
Matches help sponsors
The analysis of the data from ESPN Sports and National Stock Exchange of India shows that the mean daily returns during IPL are higher than annual mean daily returns. The stocks of the sponsors of the IPL teams performed better during IPL than the other periods.
Further, the team winning IPL title in a season influences the returns of the sponsor’s stocks in the market.
For example, DCHL stocks performed terrifically during 2009 because of winning IPL title by the DC team. Similarly, Reliance stock performed significantly better during 2013 after registering three successive years of negative returns thanks to their victory in the final match.
The returns of the stock of the DCHL witnessed appreciation by 42% following the victory of Team Deccan Chargers in the final match. India Cement too generated returns of 10% following its team Chennai Super Kings lifted the trophy. The Indian Cement and Reliance Industry have significant abnormal returns on the following trading day after IPL final played by their teams.
The next trading day’s stock market returns for India Cements, Apollo Hospitals, United Breweries and Sun TV Network are significantly related to the performance of sponsored teams Chennai Super Kings, Royal Challengers Bangalore, and Sun Risers Hyderabad respectively.
Similarly, the wins are associated with positive returns for Sun TV and negative returns for Apollo Hospitals because the sponsored IPL team sponsored by Apollo Hospitals, Chennai Super Kings was defeated.
IPL causes high returns
In case of T-20 matches, the average stock market returns on the day following a loss were lower than the mean returns on the day following the game in which India won. The event analysis indicates significant difference of returns after the match from normal returns in six out of a total of 60 T-20 games in which team India played.
The impact of the performance of team India in T-20 matches on the stock market is lesser compared to that of the IPL teams on the sponsor’s stocks. Such asymmetric effect is due to substantial popularity of IPL matches.
Thus, the rationality and emotions coexist but at different points of time. Hence, investors need to factor sentiment while trading.
(The writer is an Associate Professor of Financial Economics at Indian Institute of Technology Kharagpur)