It's commonly speculated that local economies receive a boost whenever large multiregional events come into town — events such as the Olympics, the World Cup or a Democratic National Convention. Some forecasters go further, suggesting the burst of new economic activity creates positive momentum in the stock market, whether from stronger revenues or general overoptimism from traders.
Unfortunately, speculations about an Olympic boost are probably wrong, though it's impossible to say conclusively. There are very few good arguments about why hosting the Olympics is a net economic benefit; there are more and better arguments about why hosting has zero, or even negative, consequences on the economy and the stock market.
Why the Olympics Might Help Markets
According to the circular flow of income model, extra demands for goods and services from, say, Olympic tourism creates more revenue for businesses and then more income for employees, who then spend their incomes as consumers. The cycle becomes self-propelled, and the economy grows. This ostensibly increases the value of stocks and the available capital for investment.
Most arguments for an Olympic boost stem from some variation of Keynesian demand-side logic. Extra spending is always good, since spending increases business activity, and so on. Hotels and restaurants and sporting goods stores see huge spikes in sales during an Olympic event, for example, and then extra economic activity begets more economic activity, eventually resulting in a larger total product. Investors in affected businesses will see more earnings, better stock appreciation and maybe even more dividends as a result.
It is also possible that Olympic events will raise the profile of host cities and nations and, through increased awareness, attract investors or customers who might otherwise overlook the region. It's a difficult argument to quantify, but it's seemingly plausible.
Why They Might Not
There is no reason to believe businesses and investors will be pleasantly surprised when the Olympics come into town. The bids to host Olympic games take place many years in advance to allow the host country time to prepare. By the same logic, investors and businesses will be able to forecast the impact long in advance. If there is a bump in the markets, it is likely to be small, spread across many years and probably subservient to other investor concerns.
No economic decisions are made in a vacuum. If governments use tax revenue or businesses hire employees to prepare for the Olympics, it also means that fewer revenues and workers will be available for other activity. It's not enough to show that business or investment activity might pick up during or after the Olympics — it must be demonstrated that business or investment activity from the Olympics provides a larger positive impact than what otherwise would have taken place had the Olympics been hosted elsewhere. To steal a business concept, the Olympics need to have a higher internal rate of return (IRR) than the next-best alternative.
Cost is a major factor. Even though some economic theorists suppose government spending is always a growth vehicle for markets, more are skeptical about the opportunity costs of inefficient spending. Waste too much money on infrastructure and advertising, and a government risks siphoning scarce resources away from more productive uses of land, labor and capital. Some Olympic costs — stadiums that might never be used again or extra security for the duration of the event — provide little, if any, productive value.
Also, projections about the strong economic benefits of hosting major events often come from significantly biased sources. This could be local elected officials seeking the political and social recognition or businessmen expecting a disproportionate benefit from incoming tourists. It is in their interests to announce major economic advantages from hosting big events; it's usually more than a happy coincidence that their own benefits are so aligned.
In 2009, economist Robert Baade co-authored a study on the impact of national political conventions, finding no significant economic impact. Arguments to the contrary, he concluded, were used "in order to get the money you need to host the event."
Looking at the Data
It's very tricky to approximate impact across different times, countries, cultures and economic zones. A tourist dollar spent in Rio in the 2016 Olympics probably won't have the same average impact as a tourist dollar spent during the 2012 London Games. Look at some critical examples, however, and some warning signs show up.
In 2016, the Rio Games attracted more than 6.6 million foreign tourists, setting a new record for Brazil's tourism. Furthermore, the 2016 GSI report suggested that Rio netted $1.2 billion in tourism due to the game. However, there is no guarantee that the Olympics will always create a net surge in tourism or spending. Consider the 2012 London Games, when more than 20 million people from more than 200 countries visited and spent more than $14 billion in the city during the month of August. Those numbers seem huge, but net business activity and tourism in London were actually lower in August 2012 than in August 2011; travelers were likely turned off by the prospect of swarming and confusing Olympic activity. Many non-tourist businesses suffered from customers staying home and avoiding congested trains and roads.
National and local governments spend exorbitant amounts of money on the Olympics. In 2016, Brazil's government spent over $13 billion to host that year's Summer Olympics. The much-anticipated Beijing Games of 2008 triggered a $43 billion spending spree by the Chinese government. Keep in mind that all government spending eventually coincides with a negative economic activity: all else equal, there will be higher taxes, higher borrowing costs — the "crowding out effect" — or higher inflation.
This highlights another problem with projecting future benefits. Economic projections use cost estimates, and government spending projections for the Olympics tend to be wildly inaccurate. Research in 2014 suggests that the host nation normally spends 180% more than budgeted.
Take Brazil's bid to host the 2016 Olympics in Rio: when the first bid was made in 2009, Brazil estimated it would cost $2.8 billion to prepare Rio for the event. By 2016, new estimates were closer to $10 billion — an increase of more than 257%,
The data for the "exposure" argument is also slight. There is very little evidence showing that net investments go up during or after hosting the Olympics. Many point to research from a 2009 study by Andrew Rose and Mark Spiegel demonstrating significant boosts in trade for the host country, which gives the exposure theory legs. Unfortunately, their research also showed an increase for countries making losing bids for the Olympics, suggesting that the real driver is increased openness to the international community.