By Sungho Cho, JD, Ph.D.
Introduction
Sponsors expect that athlete spokespersons would increase their brand equity (Gwinner, 1997). Although merits of celebrity endorsement have been well documented, studies also highlighted negative outcomes from the practice when spokespersons are involved with controversial behavior (Mudrick et al, 2019; Sanderson et al, 2016; Schmidt et al, 2018; Smith, 2019; Watanabe et al, 2017). Since the value of athlete endorsement predicates on the wholesome public images of the spokespersons, sponsors would terminate the contracts in case of scandals. While such severance under the morals clauses has been upheld by court (Nader v. ABC, 2005), a critical question remains, i.e., whether controversies around athlete spokespersons would be detrimental to sponsors regardless of different characters of scandals (Abeza et al, 2020). This project examines how athlete spokespersons’ controversial acts would affect the shareholder wealth of their sponsors by using the event study analysis method (Bartz et al, 2013; Hood, 2012). Two different categories of controversial spokesperson behavior, i.e., incidents of moral turpitude and social activism, are compared.
Incidents of Moral Turpitude v. Social Activism
Sponsors reserve rights to terminate endorsement contracts under morals clauses if their spokespersons are implicated with scandalous behavior. Nader v. ABC (2004, p. 346) provides a typical morality clause: “[i]f … [spokesperson] shall commit … anything which might tend to bring [spokesperson] into public disrepute, contempt, scandal, or ridicule, or which might tend to reflect unfavorably on [sponsor] … [Sponsor] may … immediately terminate the [endorsement contract] hereunder.” Although the language is notoriously ambiguous, such provision has been enforced by courts since it was drafted in response to the famous arrest of Fatty Arbuckle, a movie star, on rape and murder changes (Epstein, 2015). While sponsors may terminate agreements almost at-will, the unique nature of the relationship management in the endorsement practices and other strategic concerns would make such decisions complicated (Connor, 2010; Roberts & Burton, 2018). Specifically, research shows that different outcomes have been observed based on the types of scandals (Kwak et al, 2018; Sassenberg et al, 2018).
What constitutes moral turpitude might be a challenging question. At least, the concept of crime of moral turpitude suggests the nature of the action’s reprehensibility. According to Dadhania (2011), the crime of moral turpitude can be defined criminal misconduct in which moral turpitude is inhered in the elements of such crime. Black’s Law Dictionary (1990, p.1008-9) provides a definition: “[An] act of baseness, vileness, or the depravity in private and social duties which man owes to his fellow man, or to society in general, contrary to accepted and customary rule of right and duty … [A] behavior that gravely violates moral sentiment or accepted moral standards of community and is a morally culpable quality held to be present in some criminal offenses as distinguished from others.” Thus, the social definition of immorality has been incorporated into the legal concept. Controversial spokesperson behavior might have different attributes (Kwak et al, 2018). While salacious incidents covered by news outlets such as heinous crime or immoral scandals would have negative impacts on the suspects’ sponsors (Abeza, 2020), participation in social justice initiatives may appeal some consumer groups based on their social identities and political orientations (Sanderson et al, 2016). Since the reprehensibility might be different based on the nature of incidents, this study examined the impacts of spokespersons’ behavior by comparing two dichotomized categories: (1) scandals related to moral turpitude; and (2) social activism.
Methodology & Result
An event study analysis measures the magnitude of the effect that an unanticipated event has on the expected profitability and risk of a stock portfolio of firms associated with that event. It is one of the most widely used methodologies in finance, accounting, law, and management (Agrawal & Kamakura, 1995). The methodology is consisted of five steps: (1) defining an event when the information became public; (2) measuring a target security’s actual return on the dates of interest; (3) estimating the target security’s expected return; (4) computing the abnormal return by subtracting the expected return from the actual return; and (5) assessing the statistical significance of the abnormal return. (Bhagat & Romano, 2007).
For the event study analysis, markets are presumed to correctly and quickly response all publicly revealed information. This presumption is predicated on the so-called efficient market hypothesis (Johnson et al, 1991). In this study, the authors define the “event” as athlete spokespersons’ controversial acts. The event must be initiated by or connected to an endorsement company which is publicly traded in the stock markets.
In this study, a market model is estimated for each individual firm using stock trading days of returns against the market value, S&P 500 and this is employed to compute the cumulative abnormal return (CAR) within 1 day (+1), 2 day (1, +1), 3 day (-1, +1),5 day (-2, +2), and 21 days (-10, +10) time windows. Z-test and the generalized sign test are applied to test the significance of abnormal returns (ARs) and cumulative abnormal returns (CARs). A set of t-tests compares two different types of prominent spokesperson behavior, i.e., incidents of moral turpitude and social activism, in terms of their impacts on the stock-market performance of sponsors. The result showed that at the 15-day marks from the incidents, the abnormal returns of the two groups of sponsoring companies became statistically different. While social activism resulted in negative abnormal returns, immoral incidents did not. It is speculated that investors perceived risks associated with social activism as more serious threat to shareholder wealth than individual spokespersons’ deviant behavior.
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