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Determinants Of Value For Prospective Major League Baseball Franchises

2550 words - 10 pages

Determinants of value for prospective Major League Baseball franchisesDaniel Peterson1. IntroductionThe values of Major League Baseball (MLB) franchises and professional sports franchises in general have garnered a good deal of attention from econometricians during the last decade. The large amount of attention sports receives in the media combined with the staggeringly large values of many franchises have resulted in a significant amount of scholarly interest in the topic. Sports franchises are also interesting from an economic perspective because their business models are so unique. The profitability of franchises often hinges upon intangible assets which are difficult to quantify. As a result, econometricians must use creativity in attempting to identify variables which affect franchise values. This challenge has made professional sports an attractive area for economic modeling.While there has been extensive research on franchise values, the nature of the variables used in most models renders this research useless for prospective new franchises interested in determining what their value might be. The purpose of this paper is to identify factors that may be helpful in predicting the value of franchises interested in joining the MLB. Admittedly, determining the value of a franchise that does not yet exist is not an easy thing to do. However, the unique business model of professional sports franchises which is heavily dependent upon market size may help in accomplishing this task.The majority of prior research has attempted to explain franchise values using a variety of factors, most notably data concerning annual revenues from sources such as television contracts, ticket revenues, stadium contracts and a variety of other assets and liabilities held by franchises. For example, Smith (2004) attempted to explain the Forbes values of professional sports teams from the "big four" (Major League Baseball, National Football League, National Hockey League, and National Basketball Association). He found that in each league revenue and value were highly correlated, and that revenue was generally multicollinear with many other variables. This suggests that perhaps the most important predictive factor of a team's success is revenue. Alternatively, it could be that the Forbes values are based on revenues when in reality other factors are more important. Believing that revenue was a determinant of value, Smith (2004) also created models with revenue as the dependent variable, finding that championship wins, newer stadiums, and whether or not two pro teams of the same sport were located in a single city were some of the most useful variables in explaining revenue. Miller (2007) also found that newer stadiums increased franchise values, and in addition found that private ownership of stadiums significantly increased value. Humphreys and Mondello (2008) attempted to explain the actual sales prices of teams from the big four that were sold between 1969 and 2006....

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