3Qs: Athletes’ stock a whole new ballgame

karthik150

Last week, the startup com­pany Fantex Inc. announced a new mar­ket­place for investors to buy and sell shares linked to the brand value and eco­nomic per­for­mance of pro­fes­sional athletes—and one day per­haps other celebrities—based income from future con­tracts, endorse­ments, and appear­ances.  For its ini­tial public offering, Fantex signed a con­tract with NFL run­ning back Arian Foster to con­trol a minority interest in his brand. How­ever, industry experts note that Fantex’s IPO filing indi­cates share­holders won’t have a direct invest­ment in Foster’s brand itself; instead, their share will rep­re­sent an own­er­ship interest in Fantex. We asked Karthik Krishnan, assis­tant pro­fessor of finance in the D’Amore-McKim School of Busi­ness, to examine this new mar­ket­place and the rela­tion­ship between sports and business.

Assistant professor of finance Karthik Krishnan discusses the impact of a newly announced marketplace for investors to buy and sell shares linked to the brand value and economic performance of professional athletes. Photo via Thinkstock.

What do you see as the greatest strengths and risks of this investment opportunity, for Fantex, the athlete, and investors interested in buying stock?

Compared to traditional stock investing, the investor does not have the ability to influence the actions of the athlete through the stockholder vote. This may, however, be less of a concern for smaller investors who may not typically attend corporate annual shareholder meetings. On the other hand, this does provide an avenue to obtain equity in the athlete’s human capital and the future earnings linked to that human capital.

Fantex is taking some risk, although not too much. There is the possibility that investors’ interest in “athlete equity” may diminish if they don’t make high returns on this investment, and such a scenario can take the steam out the entire “asset class.” Another is that, if the idea is successful, there may be little barrier to entry for larger and well-capitalized competitors such as established stock exchanges and brokerage firms. On the other hand, if they can do this well and establish themselves quickly, Fantex can establish itself as a brand name for an entire asset class.

Finally, the athletes can diversify away the risk associated with failure of their human capital. They get a fixed payoff—the investors’ money—in return for a share in their future earnings. They are actually better off if they don’t expect their career earnings to increase much more. But this brings to light the risk to investors that athletes who actually know with some certainty that they will earn more may not want to part with a share in those earnings. Consequently, this market may have a larger than normal share of athletes who know beforehand that their earnings will either stagnate or not increase too much in the future. This would lead to investors overpaying for the stock in the athlete’s earnings. This phenomenon is called “adverse selection,” and is one reason that a (seasoned) corporate stock issue announcement elicits a negative market reaction.

Sports franchises' values continue to soar, while analysts estimate the fantasy sports industry at more than $1 billion this year. What's your take on the future outlook for the business of sports, and how this new venture is trying to capitalize on this popularity?

Sports is a passion activity. Thus, sports related businesses will, without a doubt, do well. This new innovation will likely feed from this passion in the beginning. I suspect that, if it does grow, athlete “stock” market capitalization may reflect both the passion in the sport of existing sports fans and its ability to attract market participants who are otherwise uninterested in sports and get involved for the financial benefits.

Thus, this new market has the potential to both enhance the existing interest and bring in new interest from those who currently do not follow sports franchises. However, as with any other asset, greater participation by uninformed investors can bring boom and bust cycles.

This platform provides an interesting avenue for investors to invest directly in something that they are passionate about, and perhaps they may even know more about than financial investments. Equity securities in human capital, as I like to think of this, are a novel concept, and actually may have broader applications for singers, actors, artists, and other entertainers. As I mentioned, investors do face some of the familiar risks associated with investing in financial equity markets.

Today more than ever, athletes and celebrities are using their success and status to develop themselves as "brands" through avenues such as social media and advertising. How do you think this venture fits into that picture?

This venture represents a way for athletes and celebrities to monetize their “brand” faster than before. Rather than wait to get a Nike endorsement, for example, an athlete may be able to make money earlier by signing with Fantex, and thereby agreeing to hand over a percentage of those expected endorsement earnings by selling a portion of that revenue to investors.

An interesting issue is how market price movements of a celebrity’s “stock” will reflect their expected gains or losses in popularity. Having a public reflection of one’s value may encourage one to work harder. Then again, it may make one obsessed with short-term changes in their market “prices” and impact their focus and performance negatively.

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