7 Celebrities and stock market fluctuations: correlation or causation?

Celebrities and stock market fluctuations: correlation or causation?

By: Prachi Joshi (FORE School of Management)

It isn’t unusual to be in the news when you are one of the best football players in the world, especially during the UEFA European Football Championship. It is however a bit uncommon for those write-ups to feature in the business and finance section instead of the sports section of the bulletin.

As it turns out, Christiano Ronaldo has accomplished that feat. The Juventus forward recently made headlines for allegedly causing a whopping $4 Billion loss to coca-cola at a press conference after he moved two coca-cola bottles, choosing water over the soft drink.

Following Ronaldo’s lead, Italian footballer Manuel Locatelli did the same thing. A similar act was performed by French midfielder Paul Pogba who removed a Heineken bottle from his view at another press conference.

Both these beverage makers being top tier sponsors of the football championship had their products prominently displayed at the media events as a part of the commonly practiced product placement strategy.

This act led to the UEFA issuing a notice to the players telling them to refrain from removing sponsors' products during press conferences.

There was a 1.6% decrease in the share prices and a $4 billion fall in the market value of cocacola. Ronaldo was blamed for both of these.

This isn’t the first time when a public figure has been blamed for stock market movements. Back in 2018, Kylie Jenner’s tweet stating she doesn’t use snapchat anymore was blamed by many for a $1.3 billion decrease in the market value of the parent company.

We live in a world where tweets by people such as Donald Trump and Elon Musk have been known to prompt movements in the stock markets. Be it the Tesla founder’s influence on prices of cryptocurrency or the former U.S. president’s peculiar tweets led to the creation of ‘The Volfefe index’ - an index created by JPMorgan to measure the impact of then U.S. president’s tweets on the country’s treasury bills.

This raises an important question - Can celebrities significantly influence stock prices and market value? Are these merely coincidences or do these people really wield that kind of power? Before we answer this question, it is important to understand the difference between correlation and causation. It is important to note that “correlation does not imply causation” Causation indicates a cause and effect relationship.

For instance, when the sales of popsicles increase, the number of deaths by drowning also increase. Does this mean that consumption or sale of popsicles is the cause for drowning?

No. Certainly not. People buy more popsicles during the summer season. Similarly, the number of people going to the beach or the swimming pool during the summer season is also more.

While Popsicle sales and drowning are correlated, they do not have a causal relationship. Both these variables have a causal relationship with weather but not with each other.

It is quite easy to jump to conclusions and assume that there exists a cause and effect relationship between the actions of the celebrities and the fluctuations in the stock prices but, we need to look at the bigger picture and in order to determine whether the relationship is that of correlation or causation.

In the post-truth world, we often give in to confirmation bias and draw conjectures based on that Similarly, In the case of coca cola and snapchat, it is easy to solely blame Cristiano Ronaldo and Kylie Jenner respectively for the fluctuations in stock prices. There is no conclusive evidence to prove the same.

The two public figures were, to some extent, responsible for the market noise which is a routine short term fluctuation but, there were a lot of other factors at play. The prices of both these companies were already in decline when Jenner and Ronaldo made their move.

A point to be noted is that on the day of the press conference, coca-cola’s shares became ex dividend which means that all dividend for that year had been distributed. It has been observed that there is a general trend of fall in stock prices occurring after the dividend payout. Another fact is that U.S. markets opened lower that day.

Coca-cola’s shares were already down by 0.9% before even the infamous press conference began. Same goes for the stock prices of Snap inc. which were down a week before Kylie’s tweet. These alternative facts imply that contrary to the popular belief, Kylie Jenner and Christiano Ronaldo did not cause these fluctuations.

It is important for investors to ignore the market noise and not rely on the actions of celebrities while making important investment decisions because the influence of celebrities in the stock market is generally short lived. This is because they have little to no impact on the actual value of the company.

References

1. https://www.business-standard.com/article/sports/footballer-cristiano-ronaldo-knocksoff-4-billion-from-coca-cola-s-value-121061600680_1.html 2. https://www.cnbctv18.com/business/companies/why-ronaldo-alone-wasnt-responsiblefor-coca-cola-losing-4-billion-9801601.htm 3. https://www.goal.com/en-in/news/cristiano-ronaldo-coca-cola-controversy-euro-2020press/boc10jxcu1791950qedw9ydzf