Finance Uncategorized

Does winning correlate with franchise value?

Looking at whether or not the on-field success of a franchise has an impact on its valuation.

(John David Mercer-USA TODAY Sports)
(John David Mercer-USA TODAY Sports)

Every year Forbes releases franchise value rankings for the four major professional sports leagues and every year several franchises that sit atop the standings ultimately are found somewhere in the middle or bottom of the rankings. For instance, the San Antonio Spurs rank 10th in the NBA in franchise value this year, despite being the league’s most consistent performer on the court. In the NHL, the San Jose Sharks rank second over the last 10 years in winning percentage, winning 59 percent of its games, while the Toronto Maple Leafs, an Original Six franchise, ranks 26th, winning only 45 percent of its games. However, the Maple Leafs are one of the most valuable franchises in all of sports, valued at $1.15 billion, almost three times as much as the Sharks. Further examples can be found in every sport.

Clearly market size, and thus revenue generation, primarily determines the value of a professional sports franchise. However, I was curious to determine whether recent success — specifically a team’s winning percentage over the last 10 years — has any impact on its franchise value.

Here is a plot of 10-year win percentage vs. Forbes franchise value for every franchise in the four major leagues (each franchise’s value and winning percentage is normalized per its respective sport):

Franchise WinningAnalyzing the graph

If there were a perfect positive linear relationship between franchise values and winning percentage, teams would only fall in the top right and bottom left quadrants — there could be no losing teams with high values and no winning teams with low values. This, however, is not the case.

Top Left Quadrant

The top left quadrant consists of teams with above average franchise values and below average winning percentages. The Toronto Maple Leafs and the New York Knicks are the highest valued franchises in their respective leagues, yet neither team has managed to win close to 50 percent of its games over the past 10 seasons. There are no small market teams in this quadrant.

Top Right Quadrant

The top right quadrant is made up of teams whose franchise values and win percentages are above average. The Yankees have a franchise value of $2.5 billion, more than three times the league average. The team has also won almost 59 percent of its games, far more than any other in the MLB. While the top right quadrant represents teams whose franchise values are representative of their win percentage, there are some teams, like the Spurs, Red Wings, Colts, and Cardinals who are slightly above the average franchise value, yet far above the average win percentage. These four teams have been some of the most prolific franchises in pro sports in the past 10 years, yet each team has an average valuation compared to its league counterparts.

Bottom Left Quadrant

This quadrant represents teams with below average franchise values and winning percentages. Two teams that stand out in this quadrant are the Edmonton Oilers and the Carolina Hurricanes.  The Oilers have the worst winning percentage in the NHL over the last 10 years yet are just below average in franchise value. In the NHL, clearly it pays to be Canadian. The Carolina Hurricanes have one of the league’s worst franchise values, yet are just below average in win percentage. They are in a relatively smaller market, which seems to explain their low value.

Bottom Right Quadrant

The bottom right quadrant is perhaps the most intriguing. This group of teams wins more than 50 percent of its games, yet is below the average value. A few teams that stand out are the San Jose Sharks, the Pittsburgh Steelers, and the Nashville Predators. The Sharks and the Steelers both win at consistent rates, yet have slightly below average franchise values in their respective sports. The Nashville Predators are an interesting case. This team wins a lot (53 percent) but has one of the lowest franchise values in the league. The franchise suffers from low attendance and a small, non-traditional hockey market.

Methodology

To create the data for this visual, I first had to account for differences across the four leagues. In the NFL, a typical franchise value is much higher than in the other three leagues. Additionally, while the mean winning percentage (50 percent) is the same across all four leagues, the standard deviation of winning percentage varies. In other words, great teams win a fewer percentage of their games in MLB compared to the other three leagues. After taking a Z-Score to standardize Forbes value and 10-year win percentage for each league, I plotted the data. A positive linear trend indicates that teams with higher win percentages have higher valuations. A random plot indicates that there is no relationship between 10-year win percentage and valuation.

Linear Trendline

The graph appeared to show a weak positive linear slope. Without removing outliers, a trend line revealed a .3788 slope with R squared equal to .1435. This means that the result of the regression (inserting the trend line) is significant (R squared is above acceptable .1) and that as the Z-Score of Winning Percentage increases by one, the Z-Score of Franchise Value increases by .3788. Remember, the Z-Score is a method used to standardize the data across each league.

Linear Trendline Without Outliers

I then removed the outliers that seemed to have the strongest effect on the trend line: Maple Leafs, Knicks, Redskins, Cowboys, Yankees, Lakers, Dodgers, and Patriots. This increased R squared to .1893, indicating a stronger regression, and returned a slope of .2354. The data still denote a positive linear relationship between franchise value and 10-year win percentage.

Conclusion

The findings from this research are revealing, though unsurprising. Winning clearly has a positive impact on franchise valuation, but its effect is limited based on market. It is not a coincidence that the Yankees, Cowboys, Maple Leafs and Knicks are the highest valued teams in their respective leagues. New York, Dallas and Toronto are all top markets; the Yankees and Cowboys have benefitted from aggressive ownership, while the Maple Leafs and Knicks have legacy and history on their side. Conversely, the Spurs, Sharks, Colts, and Cardinals, to name a few, all boast stellar winning percentages and lie just above or below average franchise value. These teams won’t be able to catch up with their large market counterparts, but winning is paramount to maximizing franchise value in a small market. For the marquee franchises, increasing valuation has a lot less to do with wins and losses.

0 comments on “Does winning correlate with franchise value?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: