Chapter 1
Introduction to Sport Finance
Chapter Overview
I. Introduction
II. What is finance?
a. Money and capital markets
b. Investments
c. Financial management
III. Five ways to finance the operation of a sport organization
a. Debt
b. Equity
IV. Overview of the industry
a. North American Industry Classification System (NAICS)
V. Financial size of the sport industry
a. Gross domestic sports product
VI. Structure of sport businesses
a. Franchise ownership models
i. Single owner/private investor model
ii. Distributed club ownership model
VII. Financial and economic factors affecting sport
a. Economic cycle
i. USOC
ii. Collegiate athletics
iii. Women’s professional sports
iv. NASCAR
VIII. Conclusion
Key Concepts
When reading this chapter, students should focus on the following key concepts:
1. The sport industry is unique and therefore creates unique challenges for financial
2. While the financial goal of most firms is wealth maximization, the goal of a franchise
owner may differ. This has led to salary constraints, revenue sharing, and other
3. Sport organizations rely on five forms of financing—debt, equity, retained earnings,
government, and gift.
4. The structure of a league and that of team ownership impact financial management
5. Growth in sport is linked to economic growth. Financial managers must monitor
changes in the economy that may impact the financial operation of their organization.
Quiz Questions
Multiple Choice
1. Three interrelated sectors exist within finance. Which of the following sectors focuses
on security choices made by individual and institutional investors as portfolios are
being built?
a. Money and capital markets
b. Investments
c. Financial management
2. When an organization borrows money that must be paid back over time, usually with
interest, what kind of financing is being used?
a. Debt
b. Equity
c. Retained earnings
3. Three interrelated sectors exist within finance. The goal or outcome of those working
in which of the following sectors is to acquire and secure funds to maximize
shareholder wealth?
a. Money and capital markets
b. Investments
d. Derivative trading
e. None of the above
4. This type of financing includes charitable donations, either cash or in-kind, made to an
organization and is the primary source or operating and investing income for major
collegiate sports programs.
a. Debt
b. Equity
e. Gift
5. Three interrelated sectors exist within finance. Which of the following includes
securities markets, investment banking, insurance, and mutual fund management?
a. Money and capital markets
b. Investments
c. Financial management
6. Typically, owners in a specific industry compete for wealth maximization. Owners in
sport might not be interested in this goal. Rather, they may be interested in
__________.
a. Winning championships
b. Seeking celebrity status
c. Protecting a community asset
d. All of the above
e. None of the above
7. For all sport and entertainment organizations, __________ financing may include land
use, tax abatements, direct facility financing, and infrastructure improvements.
a. Debt
b. Equity
e. Gift
8. Of the following statements regarding the Arts, Entertainment, and Recreation
segment (NAICS 71) of our economy, which of the following is true?
a. The industry employs a large number of full-time workers and relatively few
seasonal and part-time workers.
b. Those working in the industry tend to be older than those working in other
industries.
d. Almost all leisure time activities, including watching movies, are a part of this
sector.
e. Rising incomes and increasing leisure time over the next 10 years should lead
to an increase in demand in this sector.
9. Under this sport franchise ownership model, __________ is the most common model
of team ownership.
a. Single Owner/Private Investor Model
b. Multiple Owners/Private Investment Syndicate Model
c. Multiple Owners/Publicly Traded Corporation Model
10. Other than __________, sport leagues in the United States are subject to the Sherman
Act.
a. The National Football League
b. The National Basketball League
c. Major League Baseball
d. The National Hockey League
e. Major League Soccer
True/False Questions
1. T or F The sport industry relies on the discretionary income of spectators and
participants.
2. T or F The single entity structure is used by MLB, the NBA, the NHL, and the NFL.
3. T or F The single entity structure is used by Major League Soccer.
4. T or F Distributed club ownership model leagues are sometimes structured as non-
5. T or F Yankee Stadium was financed by the team using a form of equity financing.
6. T or F Gift financing is a minor source of operating income for major collegiate sports
7. T or F The sport industry is classified as an industry by the U.S. Census Bureau.
8. T or F The largest grouping of sport businesses is within NAICS 71, the Arts,
9. T or F The Gross Domestic Sports Product (GDSP) is the market value of a nation’s
output of sport-related goods and services in a given year.
10. T or F Antitrust law applies to single-entity sport leagues.
Answers to Quiz Questions
Multiple Choice
Numbers in parentheses represent where, in the text, you’ll find this discussed.
1. b (p. 5)
2. a (pp. 6–7)
True/False
Numbers in parentheses represent where, in the text, you’ll find this discussed.
1. T (p. 20)
2. F (pp. 17–18)
7. F (p.11)
Responses
1. What are the five forms of financing, and how is each used in sport?
See pages 6 through 10. Answers will vary, as many different examples of each
form of financing exist. Here are the five forms with an example of each:
Debt―Bond financing to build a new stadium or borrowing from a
bank. The Yankees used bonds and a loan from a group of banks to
finance Yankee Stadium.
Equity―Selling a share in your business to raise capital. Stephen M.
Ross used equity financing to raise funds for the Miami Dolphins.
Typically for sport teams, publicly traded equity financing is not used.
2. What is financial management? How does financial management differ in the sport
industry as compared to other industries?
See page 5 and 6. Financial management involves decisions within firms regarding the
acquisitions or uses of funds, usually with the goal or outcome of wealth
maximization. In sport, financial management differs for several reasons. Owners have
diverse objectives for owning the team that may be counter to maximizing wealth. The
3. Why does the definition of the sport industry affect the calculation of its size? How
should the industry be defined?
See pages 10 through 14. How the industry should be defined really depends on the
instructor’s view of the industry. As can be seen in the readings, there is no consistent
4. Which has a greater impact on financial management: the structure of a league or the
structure of a team?
See pages 14 through 19. There is no right or wrong answer here. Both league and
team structure impact financial management in unique ways. The important point is
5. Many factors affect the economics of sport. What are some not discussed in the
chapter? How do they affect financial management within the industry?
See pages 19 through 23. Sport depends on discretionary spending, and the industry
grows and contracts as the levels of discretionary spending do the same.
There is a link between sport economics and sport finance, and many economic
concepts―like competitive balance, competitive advantage, and competitive
6. Why is sustainability in the sport industry linked to the green movement?
See pages 25 and 26. Discuss this with your students. Is it because of a team’s concern
for the environment, because it is the expected thing to do, or because it adds to the
financial bottom line? (That is, it reduces expenses or generates additional revenue.)
The key here is to note that sustainability has been discussed prior to the recent green
7. What legislative actions currently being considered in the U.S. Congress may affect the
financial management of sport?
See pages 27 through 28. Follow developments through sources such as the
SportsBusiness Daily/Journal or the Sports Law Blog. These will change over time and
as you teach the course. For example, in November 2015 Senators McCain and Flake
Responses to Questions
See pages 17–18; 31.
1. Why was the WNBA structured as a single-entity league when it was founded? What
advantages or disadvantages did the structure provide to the league?
Historically, women’s professional basketball leagues have struggled to survive
beyond a few years. As a single entity owned by the NBA, the WNBA had the financial
2. What impact did the first CBA have on the WNBA, and how did each of the CBAs affect
the league’s profitability?
Primarily, salary increased and therefore team expenses increased. Furthermore, a
retirement plan was introduced that was funded by the league, and year-round health
3. What factors have caused the WNBA to move away from the single-entity structure?
Losses by franchise operators and frustration by NBA team owners over losses by the
4. For new leagues, why is the single-entity structure appealing? At some point, do start-
up leagues have to move away from this structure? Why or why not?
New leagues that have been formed as a single entity are appealing as they constrain
costs; contracts and salaries are negotiated with the league. It is debatable if leagues
need to move away from this structure. MLS continues to grow and has been