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Original Articles

Regulatory own goals: the unintended consequences of economic regulation in professional football

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Pages 151-170 | Received 26 Apr 2018, Accepted 19 Feb 2019, Published online: 03 Apr 2019
 

ABSTRACT

Research question

In 2010, the governing body of European football, UEFA, approved ‘Financial Fair Play’ regulations. Designed to encourage financial discipline, promote stability and foster competitive balance, they focus on a financial breakeven constraint. We analyse the impact of such constraints on the joint sporting and financial efficiency of English football clubs.

Research methods

The simultaneous production of both sporting and financial outputs are modelled using stochastic, non-parametric efficiency analysis. The sample is an unbalanced panel representing 60 clubs spanning the 2003/2004 to 2016/2017 seasons.

Results and findings

The Financial Fair Play breakeven regulation reduces average club efficiency, raises the relative importance of financial goals (capturing revenue share) whilst lowering the relative importance of sporting goals (capturing point share). The efficiency costs of regulation are not borne equally by clubs.

Implications

Breakeven regulations reduce the joint sporting and financial efficiency of regulated clubs, with the efficiency loss positively related to the severity of the breakeven constraint. The Financial Fair Play regulations further entrench the financial and sporting power of elite clubs and potentially undermine league competitive intensity by shifting the relative focus of clubs away from sporting productivity toward financial productivity.

Acknowledgements

The authors would like to thank Thomas Peeters, Stefan Szymanski, Timo Kuosmanen, Andrew Johnson, John Turner, John Wilson and Paul Schure and two anonymous reviewers for helpful comments during the development of this paper. The authors thank Ashleigh Neill for research assistance. In addition, the authors would like to thank the Sports Business Group at Deloitte LLP for access to club financial data. All errors and omissions are our own.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 These unintended consequences can stem from many sources: human error; the inability to model complex interactions amongst regulated actors; the ‘imperious immediacy’ of a single regulatory interest to the detriment of all others.

2 Akerlof (Citation1976) notes that competitive sporting leagues have a ‘rat race’ structure where teams compete for mutually exclusive ranking. By placing budget constraints on clubs, the regulations reduce the market-clearing price of playing talent (Budzinski, Citation2014; Szymanski, Citation2014). Given the close link between playing talent and sporting production, budget constraints reduce the market clearing price of attaining a given league position. Wage constraints are not necessarily met by a reduction in the supply of football talent given its relative inelasticity to player wages. In the face of a relatively static pool of footballing talent, the primary channel for declines in sporting efficiency relate to declines in player productivity. If wage falls undermine player productivity significantly it is reasonable to assert that the quality of the competitive product should decline commensurately.

3 By March 2014, clubs were required to submit financial information in compliance with the updated regulatory code. The first break-even decisions were taken at the end of the first three-season year rolling window (in Summer 2016).

4 Given that losses are calculated on the basis of three year averages, clubs that have been relegated from the Premier League during the time period can use the maximum allowable Premier League loss (£105m/3=£35m a season including owner equity injection) for those seasons in which they played in the top flight.

5 They suggest this finding may be an artefact of the period of investigation, where intense competition for broadcasting and media exposure meant clubs where achieving a dominant sporting position to achieve higher profits in the longer term.

6 This assumption is tested, and results are available upon request from the authors.

7 A variable returns to scale specification is used to estimate these effects.

8 Goddard (Citation2014) contends the opening of competition through the promotion and relegation system creates large disparities between the operating environments of the two tiers. He argues this system has a detrimental effect on profitability, owing to the pervasive tendency to overspend to achieve promotion or avoid relegation.

9 González-Gómez, Picazo-Tadeo, and García-Rubio (Citation2011) demonstrate that clubs who sack managers mid-season have lower sporting efficiency in the lead up to the sacking, however replacement improves sporting efficiency thereafter. Bridgewater (Citation2016) suggests that the positive impact of manager appointment is short-lived and is associated with a longer term mean reversion after an initial ‘honeymoon’ period. This is echoed by Hughes, Hughes, Mellahi, and Guermat (Citation2010).

10 For example revenues relating to property development (e.g. Arsenal in 2013-2014), travel agency (Chelsea in 2003-2004) and sale of intellectual property to related parties (e.g. Manchester City in 2013-2014) have been excluded where identifiable

11 If data for a given club-year is unavailable from Companies House that club-year is excluded from the sample. In most cases non-filing clubs were under administration.

12 Accounting stock variables are measured point in time and thus left unscaled.

13 Accounting standards require the cost of acquiring a player’s registration from another club to be capitalised on the balance sheet within intangible fixed assets. The capitalised amount is subsequently amortised over the player’s contract.

14 Considering revenue as an output is consistent with the resource-based theory of industrial efficiency (Wernerfelt, Citation1984; Barney, Citation199Citation6; Rumelt, Citation1991). The flexibility of this theory has proven important in capturing the multidimensional objective of English professional football (Gerrard, Citation2005).

15 All but Arsenal won the Champions League over that period. Of the 25 Premier League seasons since its inception, these four clubs have won the title 21 times.

16 In addition to their status as sporting elite, the Big 5 have revenue generation capacity that far outstripped their domestic competitors over the sample period. Their revenue accounted for over 49.81% of Premier League revenue in 2016/17.

17 An alternative explanation asserts that the introduction of FFP regulations coincides with a period of heightened competitive intensity to avoid relegation from and gain promotion to the Premier League. If this is the case, lower levels of efficiency of clubs outside the elite may be driven by competitive dynamics rather than FFP. We proxy for competive intensity by calculating the Herfindahl index of points share amongst those clubs in the bottom 6 (and 10) places in the Premier League and those in the top 6 (and 10 places) in the Championship. We analyse the points required for survival in the Premier League, the gap between the first relegated and last surviving club, the point gap between automatic promotion and playoff places in the Championship and the point gap between the last club to qualify for the Championship playoffs and the first club to miss out. We find no statistical evidence of heightened sporting intensity in the pre and post FFP era. The results are available from the authors upon request.

18 Importantly this regression procedure is not subject to the problems of the 2 stage DEA procedure (Simar & Wilson, Citation2007) because the effects of the z variables are controlled for via simultaneous estimation of the frontier and the efficiency decomposing regression model.

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