Reversal of Fortune or Glaring Misallocation: Is a New Football Stadium Worth the Cost to a University?

29 Pages Posted: 23 Jan 2014 Last revised: 31 Dec 2016

See all articles by Joel Maxcy

Joel Maxcy

Independent

Daniel Larson

University of Oklahoma - Department of Health and Exercise Science

Date Written: January 20, 2014

Abstract

American universities, belatedly following their professional sports counterparts, are constructing new stadiums. A portion of the funds typically provided to athletic departments are drawn from general university resources. Besides increased revenue flows, indirect benefits that contribute to university objectives are typically cited as part of the demand for a new college stadium. Examples of these spillover benefits are an enhanced campus community, a higher quality student body, and more alumni donations. We analyze a university’s stadium proposal and apply standard capital budgeting techniques to the proposed stadium’s estimated cash flows. It is revealed that the project is a sound financial investment only under the most optimistic circumstances. Yet, the investment can be worthwhile to the university if the net value of the spillover benefits exceeds the financial loss. We consider all likely spillovers, and conclude that it is more likely the desired spillover benefits can be more efficiently achieved with other investment choices.

Keywords: Stadium Finance, Capital Budgeting, Externalities, University Objectives, Intercollegiate Athletics

JEL Classification: G31, I23, L83

Suggested Citation

Maxcy, Joel and Larson, Daniel, Reversal of Fortune or Glaring Misallocation: Is a New Football Stadium Worth the Cost to a University? (January 20, 2014). Available at SSRN: https://ssrn.com/abstract=2382280 or http://dx.doi.org/10.2139/ssrn.2382280

Daniel Larson

University of Oklahoma - Department of Health and Exercise Science ( email )

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