Nylon Calculus: Did Zion’s ‘shoe explosion’ actually impact Nike’s value?

February 20, 2019: the first matchup of the season between Duke and North Carolina. The NBA was on its post-All-Star break, and so the entire basketball world was focused on the most heated and historic rivalry in college basketball. Ticket prices were historically high (even approaching Super Bowl prices), and it’s no secret that Zion Williamson had something to do with it. But less than a minute into the game, Zion planted his left foot and COMPLETELY broke through his own shoe.

Everyone’s first hope was that he didn’t sustain a serious injury (which it doesn’t appear that he did, given his return to Duke’s lineup for the ACC Tournament). However, many people focused on the “bigger picture” aspects of the event, including the NBA/NCAA rule requiring kids to play for a year in college (or internationally) before entering the NBA draft, and whether or not Zion should purposefully sit out the rest of the season to protect his solidified No. 1 draft pick status in the upcoming 2019 NBA draft.

While the dialogue and debate surrounding the transition from high school to the NBA for the most elite prospects will continue, the economist in me was interested in something different — what would be the fallout for Nike? Zion was wearing the PG 2.5’s (Paul George’s signature Nike basketball shoe) when he completely broke through them. This “event” reminded me of Nike’s announcement in early September that Colin Kaepernick would star in their “Just Do It” campaign. Everyone from sports media to other news sources to Donald Trump was on this — saying that this was a terrible move for Nike, pointing to the ~3.2 percent decrease in their stock price that day. But did anyone bother to take a look at the stock prices of other notable sports shoe/clothing companies? In other words, look at trends of “counterfactual” companies? What happened to Adidas? In fact, their stock price fell by a very similar amount after Nike’s announcement (look at the dip between Aug. 31 close and Sep. 4 open). How can we say that this was a bad day for Nike because of Colin Kaepernick, and not just a bad day for sports shoe/apparel companies (or potentially an even broader set of companies)?

Analysis of Zion’s shoe explosion was likely to receive the same type of superficial treatment — “let’s just look at Nike’s stock price and see if it fell.” But did Zion’s shoe explosion actually have a causal impact on Nike’s stock price? In order to make such a claim, we need to be more careful in our analysis. Let’s first examine the immediate impact of Zion’s shoe explosion on Nike’s stock price. The figure below shows hourly stock prices for Nike, Adidas, and Under Armour on Feb. 20 and 21 (Adidas and Under Armour are widely known as the second- and third-most popular basketball shoe brands). We have 16 hours of stock price data for each of the three companies. Zion’s explosion came after the stock market closed on Feb. 20, but before it opened on Feb. 21, and so the red vertical line indicates the timing of the explosion relative to the stock market’s open hours.

Looks like there was a big dip in Nike’s stock between closing bell on Feb. 20 and opening bell on Feb. 21. Additionally, it doesn’t look like much happens to Under Armour and Adidas in response to the explosion (Under Armour goes up upon opening bell on Feb. 21 but then falls quickly after, giving a relatively flat trend over the course of the day.

So, can we just use Nike’s fall as the causal effect? Nope, there is one other primary concern in this setting to worry about — we need to make sure that the stock prices of Nike and the counterfactual group (Adidas and Under Armour) were trending in the same direction before the explosion. Basically, this convinces us that these stocks would have moved in the same way without the explosion. If the stocks are trending differently before the explosion, it’s harder to gauge the true impact on Nike’s stock price compared to Adidas’ and Under Armour’s prices, because there may have been other factors causing the trends to be different. In other words, the pre/post comparison we need between these two groups isn’t reliable. To be clear, we are still making a very important assumption that there is not another event that happens at the same time of the explosion that may have affected either the counterfactual group or Nike differentially. Given the magnitude of this shock and its exogenous (random) nature, I feel pretty good that this assumption is satisfied.

The next logical concern should be: “looking at the graph above, it doesn’t look like the prices of Adidas or Under Armour are trending the same way as Nike before the explosion.” This is where the beauty of careful and rigorous statistics comes in. We don’t need each “member” of the counterfactual group to be trending in the same direction as Nike, we just need the average of this group to be trending in the same direction. You can think of the average price of Under Armour and Adidas as it’s own company that now acts as a useful counterfactual for Nike, shown below:

Pretty similar trends in prices before the explosion (note: I use “demeaned” prices since the stock price levels are much different across the three companies). Now we can really see that Nike’s stock price (the blue line) drops significantly post-explosion, but not a whole lot happens to the price of the counterfactual group. This is the kind of rigor we need when examining and assessing causality.

While it’s important and interesting to understand the immediate impacts of these types of events, it’s also interesting to examine whether this event had a longer-lasting impact on Nike’s value. Below is a similar graph, but instead of hourly stock price data, it looks at daily data from Feb. (six business days before Zion’s shoe explosion) to Mar. 15.

Again, we see that there are similar trends in prices in the days leading up to the explosion. However, Nike’s stock price doesn’t seem to change all that much post- versus pre-explosion, but the Under Armour and Adidas’ stock prices increased significantly. If you just examined Nike’s stock in a vacuum, you would have thought there was no impact, but contextualizing the “no effect” on Nike’s stock alongside the positive effect on Under Armour and Adidas stocks is necessary to understand the implicit negative impact experienced by Nike.

While these graphs are useful in determining that there was an immediate and longer-term impact, we are interested in measuring the actual magnitude of the impact. Enter one of statisticians’ favorite tools: the linear regression. This is going to tell us “what is the exact magnitude of the impact of X on Y?” In this case, what is the effect of the explosion (X) on Nike’s stock price (Y)? What’s great about the regression is we can account (control) for what’s happening to prices in the counterfactual group also, among other things (like general time trends in prices). Remember, we don’t just want to look at Nike’s price post-explosion vs. pre-explosion — we need to account for changes in the stock price of the counterfactual group (now the average of Adidas and Under Armour stock prices) to make sure we’re getting the causal impact of the explosion on Nike’s price. The table below shows the results from the immediate price impact in column (1), and the longer-term price impact in column (2).

The dependent (Y) variable is the log of “Stock Price.” The independent (X) variable we care about is the “Post Explosion * Nike” variable. This represents the differential effect of the explosion on Nike’s stock price vs. the average of the counterfactual group’s stock prices. Since the dependent variable (Stock Price) is in log form, you can interpret this impact as a 1.6 percent immediate decline in Nike’s stock price as a result of Zion’s explosion, and a 2.5 percent longer-term decline in Nike’s price. The “stars” next to the estimate indicate that it is statistically significant, namely that we can be “confident” this effect exists. Just to be clear, the estimate on the “Post Explosion” variable represents the post-explosion impact on the non-Nike companies (e.g. Adidas and Under Armour). We can see in column (1) there was no immediate impact of the explosion on the average Under Armour/Adidas price (.02 percent), but in the longer-term analysis there was a positive impact (3.1 percent). This is in line with the intuition presented in the previous figure –- we saw the negative impact on Nike was effectively connected to the positive effect on the Under Armour and Adidas stocks. Most importantly, it is only the differential impact on Nike vs. the counterfactual group we care about — this removes any fallacy-based argument like the Colin Kaepernick one we discussed above.

This analysis suggests that the shoe explosion did have both an immediate and longer-term impact on Nike’s stock price. While a 1.6 percent immediate hit may not feel like a lot, it’s still significant money — Nike’s market cap was $133.52 billion on Feb. 20, which translates into an immediate loss of $2.14 billion for the company. In terms of contextualizing this impact a bit further, it’s actually not a huge single-day dip percentage-wise. Over the past five years, the average percentage change in Nike’s day-to-day stock price was +0.07 percent, with a standard deviation of 1.5 percentage points. So, a 1.6 percent fall in Nike’s price from one day to the next is only slightly larger than a one standard deviation change from the average day-to-day price change over the past five years. This means this event isn’t a huge outlier (for additional context, the maximum day-to-day percentage change in Nike’s price over the past five years was 10.2 percent and the minimum was -10.1 percent). A 2.5 percent dip over the course of a month is also not unheard of — the mean month-to-month percentage change in Nike’s stock price over the past five years is +1.4 percent, with a standard deviation of 4.5 percentage points. So a 2.5 percent fall is less than a one standard deviation decrease from Nike’s average month-to-month percentage change.

It’s not always the case that big events have meaningful impacts on stock prices days after they occur. For example, the table below shows the effect of Stephen Curry signing with Under Armour in September, 2013 in column (1) and LeBron James signing his lifetime deal with Nike in December, 2015 in column (2) in the two weeks after they occurred. We don’t see any statistically significant impacts (no stars!) on Under Armour and Nike’s stock price, respectively, from these notable events (note: the pre-trends assumption is satisfied in both of these cases).

This analysis shows that “notable” events can have varying levels of impact on a company’s value. In the case of Zion’s shoe explosion, it does appear that there have been economically meaningful ramifications for Nike. It may be the case that “negative” events impact a company much more significantly than positive ones (like the signings of Steph and LeBron), but without further events and evidence it’s difficult to make that claim confidently. At the end of the day, it’s important to use correct, causal-inference based statistics to measure these impacts.