Making money out of football

Making money out of football Stefan Szymanski1 Stephen Hall The Business School, Imperial College London April 2003 Abstract: In the US most economists have argued that professional sports teams are profit maximising businesses, but it is a widely held view in Europe that professional football clubs are not run on a profit maximising basis This belief has important implications for the impact of policy measures such as income redistribution that are widely advocated This paper looks at the performance of sixteen English football clubs that acquired a stock exchange listing in the mid 1990s If the European story is true, we should have observed a shift toward profit maximising behaviour at these clubs This paper finds no evidence of any shift in this direction This result is consistent with the view that football clubs in England have been much more oriented toward profit objectives than is normally allowed Keywords: economics of sport, objective functions JEL classification number: L21, L83 We thank to Dirk Nitzsche for assistance with data collection We thank Peter Sloane and seminar participants at the CARR Outreach workshop on business history for helpful comments Corresponding author: The Business School, Imperial College London, 53 Prince’s Gate, Exhibition Road, SW7 2PG, UK Tel : (44) 20 7594 9107, Fax: (44) 20 7823 7685, e-mail: szy@imperial.ac.uk “Those clubs which have floated to become public companies – Manchester United, Newcastle United, Aston Villa, Chelsea, Tottenham- now have as their principal objective the making of money for their shareholders.” -David Conn, The Football Business, p154 Introduction In North America it is commonplace, especially among economists, to think of the owners of professional sports teams as profit maximisers (see e.g Fort and Quirk (1995)) In Europe, however, this assumption has been treated somewhat sceptically In an influential paper Sloane (1971) argued that a plausible characterisation of the owners of football clubs is as “utility maximisers” subject to a budget constraint, where utility is largely associated with success on the pitch Reasons for this view include the perceived lack of profitability of football clubs and the opinions expressed by club officials In some countries football clubs are organised as sporting associations which have no shareholders, but in England all professional clubs are limited companies, and most have been so for around 100 years This study focuses on sixteen English football clubs came to be traded on the London Stock Exchange in the mid 1990s For the most part this arose through share placings and offers for sale of up to 100% of the share capital If the directors of these clubs were acting as utility maximisers prior to their flotation, then flotation should have brought about a significant change in the objectives, assuming that investors in publicly quoted corporations are interested primarily in financial returns At the time of flotation many fans expressed concerns similar to those implicit in the quote above This paper examines the performance of these sixteen clubs before and after their flotation The changes in measured performance of these clubs not seem to be consistent with a shift toward more profit oriented objectives 2 The Impact of Flotation (a) The significance of objectives for league policy It has long been recognised that the identification of the firm’s objective function is central to understanding its behaviour, and this is more than usually crucial when it comes to understanding sports leagues Members of sports leagues typically enter into a wide range restrictive agreements such as revenue sharing, limitations on players spending (salary caps and roster limits) and restrictions on player mobility These restraints, the team owners claim, are necessary to preserve a competitive balance without which the league’s product will become unattractive Antitrust authorities have in general been persuaded by this line of argument However, critics such as Fort and Quirk (1995) and Vrooman (2000) have argued that these restraints will be tend to raise profits, that this is the true motive for their adoption by owners, and that the impact on competitive balance will be negligible or non-existent The assumption of profit maximisation is critical to the validity of these claims, as has been shown in work of Kesenne (1996, 2000) Consider for example, the case of collectively sold broadcast rights In the North American major leagues the income derived from collective sale is typically divided equally among the teams What effect would this have on behaviour compared to the alternative where teams negotiate their own broadcast rights individually and retain the income for themselves? Let us suppose that if rights are sold individually then there are some large market teams that will generate a lot more income than small market teams If owners are profit maximisers there is reason to doubt whether collective selling will improve the competitive balance of the league, since owners are under no obligation to spend what they receive Thus a small market team may receive more income under collective selling, but will not choose to spend more on creating a successful team Under the profit maximisation hypothesis owners should spend up to the point where the marginal revenue of a win equals the marginal cost, and a fixed share of broadcast income will affect neither marginal revenue nor marginal cost2 However, if the owners are utility maximisers whose principal interest Indeed, collective selling will impair competitive balance if it leads to a disproportionate fall in the marginal revenue from winning for the small market team, see Szymanski and Kesenne (2003) for an example of this possibility is success on the pitch then collective selling will improve competitive balance By assumption teams spend what they get on the pursuit of sporting success, and collective selling means more spending power for the small market teams and less spending for the large markets teams (b) ownership and motives in English soccer In this paper we are interested in the possible change in behaviour associated with stock market flotation The ownership structure of football clubs in the UK is significantly different from the model adopted in other countries In most of Europe, football clubs have typically been organised as not-for-profit sporting associations Even very large clubs, such as Barcelona and Bayern Munich, have been run as clubs in a legal sense, i.e controlled by members who pay an annual subscription and managed (in a commercial sense) by a club committee One of the most practical consequences of this arrangement has been that football clubs have not been able to take advantage of limited liability and therefore their ability to borrow has been constrained3 Football clubs in England and Scotland sought to evade this restriction as early as the nineteenth century No fewer than 68 of the 92 teams in the four English professional divisions (Premier League and Football League) adopted limited company status prior to the First World War, the majority during the 1890s4 The conventional view is that the ownership of a limited company resides with the shareholders and that the shareholders are motivated by profit However, there are plausible reasons to doubt this in the case of English football clubs Firstly, analysis of shareholder lists (see references cited in footnote 4) suggest that the original subscribers were largely drawn form a club’s locality and were frequently supporters of the club and hence the profit motive may have been tempered by an interest in sporting success Even shareholders with purely commercial interests (such as local brewers) may have been more interested in the success of the club from the The finances of football clubs can be hard to understand In many cases wealthy patrons stand ready to guarantee debts, or local government is involved, directly or indirectly in financial support of the teams All of the teams in the Premier League in the current season (2002/03) were limited companies by 1920 For more details on the early history of English football clubs see Mason (1980), Vamplew (1988) and Tischler (1981) and Inglis (1988) perspective of generating income for their core business interests rather than for any direct financial return (Morrow (1999) provides a detailed analysis of the motivation of directors with dominant shareholdings) Secondly over time most of these clubs came to be concentrated in the hands of a small number of wealthy individualsusually because the limited company had fallen into financial difficulties Often these individuals were supporters themselves, and therefore unlikely to view their ownership of the club as a purely financial proposition5 This does not exclude the possibility that some owners of football clubs at some times were motivated by profit But arguably what distinguishes a private limited company from a public limited company (floated on the stock exchange) is that in the latter case the profit motive is likely to be even stronger It is not that the listing requirements of the stock exchange oblige companies to maximise profits, but rather that a stock exchange listing typically introduces a class of investors with little or no interest in the business other than the returns that it can generate, either through the payment of dividends or the appreciation of the share price Insurance companies and pension funds own the largest share of stock in most listed companies The listing requirements of the stock exchange are intended to provide such investors with all the information they require to make an informed decision about investment prospects The directors of the company are thus obliged to achieve this return for their stock holders or see the company shares decline and risk a hostile takeover that may lose them their job The view that stock market flotation will introduce commercial objectives has been advanced in the North American context Most of the Major leagues in fact ban stock market flotation on the grounds that this will lead to excessive commercialisation6 Thus while we cannot state with certainty that the directors of any single company will be more profit oriented following a stock market flotation, we can reasonably argue that on average directors of companies with a listing will be more profit oriented than directors of companies that not have a listing A third reason is that the FA disapproved of the profit motive in football and took action to try and limit commercialism by means such as imposing a limit on the maximum dividend payable by football clubs But by the 1980s restraints such as these had lost their significance (there are other ways for clubs to reward shareholders) and the will of the FA to restrain commercialism had largely evaporated Although this is perhaps odd given the prevailing view that team owners in North America are dyedin-the-wool profit maximisers See Cheffins (1998) for a critical discussion of this issue (c) the predicted impact of a change of objectives If companies that float stock on the market adopt more profit oriented policies, what does this mean in terms of the measurable performance of the company? First consider the impact of success on the profitability of a given club Success, we might reasonably suppose, is achieved by investing in the team This may mean investing in training facilities or a good manager, but more often than not it means hiring the best players, and the best players command the highest salaries The better the quality of the players on the pitch the more likely is success Szymanski and Kuypers (1999) explored at great length the data that demonstrates the extent of these relationships If a club spends little or nothing on its players, success will be limited, but profits will also be small, since few people are interested in paying to watch an unsuccessful football team If player spending increases, however, fans will be attracted and profits will typically rise This will continue up to some level of success, at which point more player spending will increase success but profits will fall This is illustrated in figure Figure here The most likely reason for this is that once a certain threshold has been reached increasing success becomes more and more expensive, while the revenues generated by that extra success get smaller and smaller For example, a moderate level of spending in the First Division offers the prospect of promotion to the Premier League once in while, but increasing that probability to a level of near certainty costs a lot more, and, once having been promoted, eliminating the probability of relegation is even more expensive For clubs without a substantial revenue base to begin with, aspiring to that level of certainty is beyond their financial capabilities The directors of a football club are able, up to a point, able to select a financial policy for the club based on the relationship between success and profits Figure illustrates Another reason why profits may decline as success increases is that fans may become disinterested in the competition because it is too predictable- this is the uncertainty of outcome hypothesis (see Szymanski (2003)) for a review of evidence on this hypothesis two different approaches The horizontal lines represents managerial indifference curves for a profit maximising owner These are horizontal because the profit maximiser cares only about profit and so aims to reach the highest horizontal curve possible- yielding the highest profit whatever the level of sporting success The concave indifference curves represent the preferences of utility maximising directors For such managers increasing profits is seen as desirable, but not if the cost in terms reduced success is too great The shape of the indifference curves imply that a manager will demand ever increasing levels of profit (resp success) to compensate for a constantly decreasing level of success (resp.profit) Figure here Given the relationship between profit and success we can contrast the optimal choices of profit and utility maximising managers in figure (this treatment is based on Vrooman (1997)8) The profit maximising manager will choose a profit/success combination tangent to the highest feasible horizontal indifference curve, shown as π(PM)* and S(PM)* in figure A utility maximising facing the same success/profit possibilities and choosing the same combination of profit and success would find themselves located on an indifference curve such as I which is not a tangency This implies that a combination of lower profits and greater success would enable to the manager to reach a higher indifference curve Ultimately a tangency such as (π(U)*, S(U)*) could be reached yielding the maximum payoff for the manager Figure here We can therefore conclude that in theory a profit maximising manager will prefer higher profits and inferior playing success compared to a utility maximising manager These effects follow directly from the supposed change in objectives Indirect consequences may follow as well if the increased scrutiny imposed by the listing requirements cause directors to be more circumspect in their policies First this may involve the avoidance of excessive risks, thus creating a more stable earnings stream Secondly, it may imply a shift in distribution policy toward higher and more regular Szymanski and Smith (1997) derive a similar relationship dividend payments, which are sometimes considered an important indicator of company performance by market investors Thirdly, it may be that company efficiency is improved, so that resources are more productive and opportunities are exploited more fully (something here which may be associated with a higher degree of commercialism- e.g raising ticket prices if it is profitable to so) Evidence Tottenham Hotspur (1983), Millwall (1989) and Manchester United (1991) were the first three English football clubs to obtain a stock exchange listing The huge increase in broadcasting income associated with the advent of the Premier League and the rapid appreciation of Manchester United share created conditions in the mid 1990s where the stock market was receptive to new issues Between October 1995 and October 1997 a further sixteen English clubs obtained a listing (see Table 1) Our strategy is to search for any changes in the performance of these recently floated companies relative to their peers in the professional leagues using the Fame database of UK company accounting information which provides online records for the previous ten years Thus in most cases we are able to track performance for about five years before and five years after flotation9 We examine four main indicators: pre-tax profits, league ranking, wage expenditure relative to the average for teams in that season and revenues relative to the average for that season The first two variables shed light directly on any possible change in objectives associated with flotation The last two relate to variables that might be related causally with changes in these variables; for instance, increased wage expenditure is likely to lead to better league performance Wage spending and revenues are expressed in terms of orthogonal deviations serves for two purposes Firstly, given the rapid escalation of ticket prices, broadcast rights values and player salaries a relative measure provides a consistent basis for comparison across years Secondly, in the context of a sports league an absolute indicator of financial performance such as profits is likely to depend on the use of inputs measured in relative terms rather than absolute terms (the absolute Since Tottenham, Millwall and Manchester United were listed during this entire period their performance has not been considered quality of a team will not determine its success on the pitch, rather its quality relative to its competitors) The financial data was downloaded from the FAME database of public and private UK companies, which in most cases provides a full ten year record for each company Table 1: Flotation particulars Club Preston North End Chelsea Leeds United Queens Park Rangers Sunderland Sheffield United Southampton West Bromwich Albion Birmingham City Charlton Athletic Bolton Wanderers Newcastle United Aston Villa Swansea City Leicester City Nottingham Forest a b c Float date October 95 March 96 August 96 October 96 December 96 January 97 January 97 January 97 March 97 March 97 April 97 April 97 May 97 August 97 October 97 October 97 Method % offered/placed Placing/offer 86 Introduction 0a Takeover and placing/offer 60 Placing/offer 44 Placing/offer 26 Takeover and placing/offer 42 Reverse takeover 100 Placing 100 Placing 30 Placing/offer 35 Reverse takeover 100 Offer 28 Placing/offer 16 Takeover 0b Introduction 0c Offer 11 Chelsea FC is owned by Chelsea Village PLC in which the directors and three other interests jointly held 83.5% of the equity at the company’s introduction Swansea City FC was purchased by Silver Shield PLC, a car windscreen replacement company Although located in Wales, Swansea plays in English Football League and hence is treated as an “English” club Leicester City FC was acquired by Soccer Investments PLC (a) Pre-tax profits and dividends There are significant problems associated with the use of accounting profits to measure the financial performance of sports businesses, as is well documented in the American literature on the subject (see e.g Scully (1989) and Quirk and Fort (1992)10) When profit and loss statements form the basis of tax assessments firms have a significant incentive to understate profits Particular government policies, for example in relation to depreciation, may create tax loopholes which enable firms to 10 Both of these drew heavily on the work of Roger Noll from Stanford University who dissected the profits statements of Major League Baseball teams on behalf of the players’ union in the 1980s and found that reported accounting profits significantly understated economic profits reduce profits and so legally limit their tax liability Owners may charge expenses to the company which bear little relation to any economic services rendered, and so transfer taxable income away from the company (e.g because personal incomes are more favourably treated) – this is legal tax avoidance (for example, it would not be illegal to pay a director £1m for 10 minutes work), or may be able to illegally evade tax by exaggerating expenses Table reports the pre-tax profits for fifteen of the sixteen clubs in Table Summing profits over the entire period only five of the clubs reported a net profit Newcastle reported a cumulative loss of £47m over this period while Nottingham Forest reported a cumulative loss of £40m In general a business that runs perpetually at an economic loss will be closed by its owners if they are profit maximisers Several of the clubs did in fact have to undergo a significant restructuring The shares of Nottingham Forest, Queens Park Rangers (Loftus Road PLC) and Leicester City have all been suspended from the market while the latter two clubs have entered administration (in 2001 and 2002 respectively) Loftus Road is no longer a listed company, while the shares of Leicester City remain suspended at the date of writing Nottingham Forest had their shares delisted in 2002 following their failure to publish their accounts and in anticipation of a restructuring involving a cash injection of £5m from a wealthy supporter Swansea City, which was taken over by a listed company in 1997 was sold to it Managing Director for £1 during the 2000/01 season) Thus it may be that the losses indicated reflect a genuine failure to produce an economic return On the other hand, Bolton has reported a pre-tax loss in each of the last nine seasons without filing for bankruptcy while Newcastle has paid out dividends in each of the past five seasons (totalling £14m) despite the size of its reported losses The ability to pay dividends is generally viewed as an indicator of financial health, although there may be many good reasons for not paying dividends It makes little sense for a company with profitable investment opportunities to return internally generated funds to shareholders Of the quoted football clubs only six have paid dividends: Aston Villa, Bolton, Newcastle, Southampton, Sunderland and West Bromwich Albion The total payout across those years were available was in the region of £0.9m per club per season 10 it may well be the case that listed companies have an incentive to report larger losses However, in most cases football was the primary business activity of the listed entity, and there are no cases of clubs becoming part of much larger commercial empires as in the US16 The fifth explanation has some merits As Table shows, several clubs floated a relatively small percentage of the stock, limiting the scope for the market in general to put pressure on the performance of the directors (although this story carries with it the implication that the directors were failing in their fiduciary duties, a serious allegation) Where small amounts of stock were on offer, it may well have been the fans who were most likely to buy However, there is plenty of evidence that institutional shareholders were significant buyers at flotation of many of these clubs, and indeed it was the perception that this was the case that gave rise to many complaints from fans about the commercialisation of football (see e.g Conn (1997)) Morrow (1997) reports that “at its 1997 accounting year end 124 institutional shareholders owned almost 60 per cent of the ordinary shares in Manchester United” However, it may be that the institutions quickly deserted the newly floated clubs once they realised that they were unlikely to see a reasonable return on their investment The charts at the end of this paper illustrate the stock market valuation of eleven clubs that floated between 1995 and 1997 as well as Manchester United What is clear is that few clubs ever saw their market value rise above the level posted in the first month of trading, and that most saw quite rapid declines in value in the first few months after flotation If this reflects institutions selling off their shareholdings, it is unclear why they should have given up on the idea quite so quickly A better picture of what happened could be constructed from an analysis of shareholder lists The sixth explanation is one that also might be consistent with the market valuation data Directors may have gambled on improving performance with a view to exploiting the very rapid growth in media income during the period The escalation of player salaries in general during this period was a reflection of this growth, and it may have appeared to be an individually rational strategy to invest relatively heavily in the late 90s with a view to obtaining a larger share of a larger pot in the new millennium 16 Not least because in 1999 the UK competition authority blocked the takeover of Manchester United by the Sky broadcasting organisation, effectively prohibiting media ownership 18 An example of this approach appears to be the performance of Leeds United, which invested heavily and gambled on achieving success not only in the Premier League but also in the UEFA Champions League They did in fact succeed in reaching the semi-final of the latter competition in 2001, only to fail to qualify for the following season and found themselves unable to fund their collection of star players Since that time they have been more or less forced sellers of large amounts of player talent It seems unlikely that any one explanation will furnish a conclusive explanation of the relative performance of the football clubs that floated in the mid 90s However, the data does at least provide a serious challenge to the received view that football clubs in England were utility maximisers rather than profit maximisers If a utility maximising club floats stock on the market the most natural implication is a shift upward in profit and downward in on the pitch performance, almost exactly the opposite of what seems to have occurred Not only did profits fall and performance improve on the pitch, but the econometric evidence suggests that the reason for this change was that the floating clubs simply spent the flotation proceeds on players While it is not impossible to construct alternative stories to explain the data while maintaining the conventional view that football clubs are utility maximiser, at the very least the explanations seem somewhat strained The alternative view- that football clubs have always been profit maximisers, in England at least, deserves some consideration 19 Table 2: Pre-tax profits (£000) Year relative Aston Villa BirmBolton Charlton to flotation ingham City Wanderers Athletic -5 -4 -3 -2 -1 Average for years before Average for years after 3542 -191 1118 3717 -65 -3926 11740 20156 -4850 138 -2626 -28 -129 -960 -164 -4,009 -4,712 -5,122 -2,514 -8,188 112 -1156 -1163 254 -2010 1249 -2797 323 1624 256 -320 6796 -2626 -5134 256 1125 Chelsea Leeds United Leicester City Newcastle Nottingham Preston Queens United Forest North End Park Rangers 804 -729 -2165 2464 -568 -3593 -253 -6307 291 -6289 -2307 -374 3766 -8111 -25117 8,302 3,669 1,373 -18,923 -8,854 247 1528 -3441 -3315 1729 -10965 -4,617 7,951 -15,222 -14,098 Sheffield United Southampton 2077 -7,052 -5,563 -8,927 -5,333 -128 1094 509 -250 -859 -4040 -6,715 -4,217 -1,635 -367 -910 -803 2,022 -3,427 -96 -1362 3395 -2045 -513 3067 3499 2311 -5962 -736 1017 1892 -39 -6429 -650 -14 1051 73 1229 -473 -243 -809 480 -1644 -3140 -5684 -6497 -637 -6719 -3234 -576 1708 195 Note: Post flotation data based on PLC accounts Profits for Swansea City not reported 20 1580 878 540 -802 -1544 -84 -2368 3,080 564 1,465 418 3,011 -165 -254 -476 -489 171 -185 612 -2,257 736 1,688 814 3093 2819 842 -875 -3,272 684 711 1,244 -7,589 164 -191 -253 62 113 -1,435 -761 -1,165 487 389 2278 Sunderland West Bromwich Albion Table 3: League rank Year relative to flotation -5 -4 -3 -2 -1 Average for years before Average for years after Aston Villa Birmingham City Bolton Charlton Wanderers Athletic Chelsea Leeds United Leicester City Newcastle NottUnited ingham Forest Preston Queens North End Park Rangers Sheffield United Southampton Sunderland Swansea West Bromwich Albion 65 51 59 56 66 73 88 75 69 67 88 10 18 6 8 48 41 44 47 35 30 27 24 25 25 25 59 48 36 25 20 21 18 26 26 23 16 29 34 33 37 26 35 24 18 21 14 11 14 11 14 11 11 6 17 5 13 11 4 26 28 26 21 25 10 10 13 20 42 23 2 13 13 11 11 22 24 20 21 20 34 31 36 63 61 63 67 75 75 69 59 59 49 45 12 11 19 29 41 40 30 43 14 20 30 29 25 26 28 36 30 33 16 18 18 10 17 16 12 17 15 10 11 41 40 43 34 42 21 18 23 21 7 43 38 32 12 25 15 13 66 20 16 40 59 44 25 22 17 5 12 10 28 56 37 31 13 15 77 30 21 53 50 43 41 31 36 30 32 41 26 22 Table 4: Spending relative to the League average Year relative to flotation -5 -4 -3 -2 -1 Average for years before Average for years after Aston Villa Birmingham City Bolton Charlton Chelsea Wanderers Athletic 1.96 1.92 2.23 2.28 2.11 2.17 1.92 2.14 2.45 2.32 0.70 0.73 0.95 1.16 1.31 1.05 0.79 0.80 0.88 0.86 0.54 0.66 0.85 0.91 1.32 1.39 1.25 1.02 1.03 0.65 0.72 0.69 0.64 0.70 1.06 1.25 1.59 2.10 0.97 0.74 2.21 0.83 1.17 Leeds United Leicester Newcastle NottCity United ingham Forest 1.75 1.80 2.39 3.01 3.61 3.20 4.62 4.05 1.96 2.24 2.29 2.43 2.76 2.47 2.36 2.24 3.00 3.85 1.03 1.12 1.41 1.49 1.92 1.58 2.03 2.26 2.05 1.63 1.99 2.35 2.27 2.79 3.50 3.28 3.06 3.12 2.41 1.43 1.93 2.84 1.83 2.33 1.73 1.73 1.52 1.24 0.99 0.69 1.78 2.23 1.26 2.21 2.07 1.15 3.70 2.78 1.98 2.97 1.37 Preston Queens North End Park Rangers Sheffield United Southampton Sunderland Swansea 0.40 0.36 0.33 0.33 0.27 0.24 0.20 0.23 0.24 0.22 West Bromwich Albion 1.39 1.59 1.44 1.41 1.37 1.09 0.96 0.77 1.15 1.27 1.13 1.01 1.07 0.94 1.19 0.92 0.62 0.57 1.28 1.44 1.41 1.53 1.13 1.03 0.92 1.23 1.50 1.44 0.36 1.46 1.12 1.36 1.06 0.34 0.71 0.35 0.94 0.83 1.27 1.68 0.22 0.61 0.33 0.40 0.38 0.33 0.35 0.35 0.29 0.42 0.41 0.97 1.05 1.15 1.08 1.22 1.23 1.26 1.28 2.50 2.16 0.74 0.71 0.69 0.68 0.75 0.67 0.64 0.59 0.71 0.53 Note: Aston Villa, Birmingham City, Charlton, Chelsea Village, Leicester City, Nottingham Forest and West Bromwich Albion figures from PLC accounts All other clubs based on Limited Company Accounts 22 Table 5: Revenue relative to the League average Year Aston Relative To Villa Flotation -5 -4 -3 -2 -1 Average for years before Average for years after Birmingham City Bolton Charlton Chelsea Wanderers Athletic 1.80 2.24 2.44 2.05 2.73 2.57 3.02 2.92 2.79 2.42 0.51 0.69 0.70 1.10 1.06 0.89 0.79 0.71 0.79 0.82 0.31 0.92 0.95 2.08 0.89 1.49 1.05 0.90 0.66 0.55 0.43 0.53 0.50 0.55 1.36 0.91 1.74 2.25 0.81 1.07 2.79 0.78 1.02 Leeds United Leicester Newcastle NottCity United ingham Forest Preston Queens North End Park Rangers 1.53 1.10 1.17 1.53 1.34 2.02 1.82 1.99 2.02 1.80 1.28 1.92 3.18 3.90 4.12 4.65 4.64 3.58 3.50 3.38 2.73 2.60 2.93 1.62 2.33 1.68 1.07 1.42 0.74 0.70 Sheffield United Southampton Sunderland 0.97 1.41 1.16 1.21 1.04 0.95 0.61 0.58 1.03 1.33 0.00 0.68 0.62 0.57 0.76 0.47 0.38 0.34 1.33 2.09 1.36 1.59 1.17 1.08 1.18 1.12 1.31 1.48 Swansea 0.32 0.30 0.28 0.19 0.21 0.14 0.16 0.17 0.16 0.15 0.72 0.79 0.71 0.71 0.57 0.53 0.52 2.00 2.17 2.55 3.52 3.69 4.61 3.16 2.06 2.93 2.60 2.33 2.72 2.59 2.68 2.96 3.95 4.69 0.50 2.00 2.48 1.33 2.88 2.44 0.29 1.19 0.73 1.51 1.59 0.32 0.76 1.14 3.51 3.38 1.91 3.77 0.98 0.25 0.71 0.49 1.27 1.23 0.16 0.58 0.30 0.28 0.29 0.24 0.26 0.25 0.26 0.26 0.28 1.33 2.09 1.36 1.59 1.17 1.08 1.18 1.12 1.31 1.48 West Bromwich Albion Note: Aston Villa, Birmingham City, Charlton, Chelsea Village, Leicester City, Nottingham Forest and West Bromwich Albion figures from PLC accounts All other clubs based on Limited Company Accounts 23 Table 6: Regression Results Dependent variable:  Rit ∆ log R  t  R  ∆ log it  R   t      Rit ∆ log R  t      P   P   P  − ∆ log it  − ∆ log it  − ∆ log it   93 − Pit   93 − Pit   93 − Pit  Variables in differences  Rit −1 log R  t −1 0.074 (0.023)     0.049 (0.028) 0.021 (0.036)  wit −1   log w   t −1   Pit −1 −log  93 − P it −1      Quotedit Divisionit Promotedit Relegatedit Variables in levels Constant  Rit −1 log R  t −1      wit −1   log w   t −1   Pit −1 −log  93 −P it −1  Quotedit-1 Divisionit-1 Promotedit-1 Relegatedit-1 Time dummies Fixed effects observations AR(1) AR(2)     0.231 (0.130) 0.245 (0.133) 0.163 (0.117) 0.102 (0.031) 0.121 (0.037) 0.053 (0.021) -0.039 (0.025) -0.034 (0.030) -0.019 (0.030) 0.047 (0.021) -0.108 (0.022) 0.055 (0.021) -0.054 (0.022) 0.053 (0.025) -0.115 (0.024) 0.062 (0.023) -0.057 (0.023) 0.021 (0.024) -0.096 (0.012) 0.034 (0.012) -0.035 (0.017) -0.021 (0.052) -0.405 (0.037) 0.190 (0.021) -0.194 (0.022) -0.031 (0.057) -0.399 (0.035) 0.190 (0.021) -0.194 (0.022) -0.024 (0.060) -0.467 (0.038) 0.213 (0.023) -0.192 (0.026) -0.084 (0.034) -0.394 (0.131) -0.035 (0.047) -0.488 (0.165) 0.214 (0.078) -0.507 (0.110) 0.313 (0.176) 0.272 (0.160) 1.060 (0.237) 0.169 (0.075) 0.163 (0.076) 0.106 (0.130) 0.186 (0.053) 0.121 (0.037) 0.106 (0.029) -0.372 (0.201) -0.339 (0.189) -0.739 (0.180) 0.038 (0.028) -0.051 (0.032) 0.077 (0.020) -0.031 (0.019) 0.069 (0.038) -0.069 (0.037) 0.084 (0.023) -0.031 (0.021) 0.018 (0.032) -0.061 (0.031) 0.066 (0.020) -0.030 (0.019) 0.051 (0.034) -0.168 (0.102) 0.191 (0.024) -0.215 (0.026) 0.045 (0.034) -0.150 (0.094) 0.188 (0.023) -0.211 (0.024) 0.032 (0.056) -0.380 (0.100) 0.251 (0.033) -0.216 (0.031) No No 604 0.58 2.1 Yes No 604 1.3 2.2 Yes Yes 604 -2.0 0.2 No No 621 -0.9 -0.53 Yes No 621 -1.2 -0.7 Yes Yes 621 -0.6 -2.1 Wit is total company wage expenditure of club i in year t, R it is company turnover, and Pit is league rank on measured from to 92, treating first place in Division One of the Football League as rank 21, first place in Division Two as 45, and so on AR(1) and AR(2) are tests of first and second order serial correlation in the errors, distributed as standard normal Figures in parenthesis are robust standard errors profit Playing success Figure 1: Profits as a function of club success profit Indifference curves for utility maximising owner Indifference curves for profit maximising owner Playing success Figure 2: Indifference curves for profit maximising and utility maximising owners 26 profits Indifference curves for utility maximising owner I0 I1 Indifference curve for profit maximising owner π(PM)* π(U)* S(PM)* S(U)* Playing success Figure 3: Equilibrium for profit maximising and utility maximising owners 27 References Arellano M and Bond S.R (1991) ‘Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations’ Review of Economic Studies, 58, 277-297 Arellano M and Bover O (1995) ‘Another look at the instrumental variables estimation of error component models’ Journal of Econometrics, 68, 29-51 Baltagi B.H (1995) ‘Econometric Analysis of Panel Data’ Chichester, John Wiley and sons Cheffins, Brian 1998 “Sports Teams and the Stock Market: A Winning Match?” UBC Law Review 32: 271-291 Conn, David, 1997 The Football Business: Fair Game in the ‘90s? Mainstream Publishing Fort, Rodney and James Quirk 1995 “Cross Subsidization, Incentives and Outcomes in Professional Team Sports Leagues” Journal of Economic Literature, XXXIII, 3, 1265-1299 Inglis, Simon 1988 League Football and the men who made it Willow Books London Késenne, Stefan 1996 “League Management in Professional Team Sports with Win Maximizing Clubs”, European Journal for Sport Management, vol 2/ 2, pp 14-22 Késenne, Stefan 2000 “Revenue Sharing and Competitive Balance in Professional Team Sports” Journal of Sports Economics, Vol 1, No 1, pp56-65 Mason, Tony 1980 Association Football and English Society, 1863-1915 Brighton, UK: Harvester Press Morrow, Stephen 1999 The New Business of Football London: Macmillan Nickell S J (1981) ‘An investigation of the determinants of manufacturing employment in the UK’ Discussion paper No 105, Center for Labor Economics, London School of Economics Quirk, James and Rodney Fort 1992 Pay Dirt: The Business of Professional Team Sports, Princeton N.J.: Princeton University Press Scully, Gerald 1989 The Business of Major League Baseball Chicago: University of Chicago Press Sloane, Peter 1971 "The Economics of Professional Football: The Football Club as a Utility Maximizer", Scottish Journal of Political Economy, 17, 2, 121-146 Szymanski, Stefan 2003 “The Economic Design of Sporting Contests” Journal of Economic Literature, forthcoming 28 Szymanski, Stefan and Tim Kuypers 1999 Winners and Losers: The Business Strategy of Football Viking Books, London Szymanski, Stefan and Ron Smith 1997 “The English Football Industry, Profit, Performance and Industrial Structure” International Review of Applied Economics, 11, 1, 135-153 Tischler, Steven 1981 Footballers and Businessmen NY: Holmes & Meier Vamplew, Wray 1988 Pay up and play the game: Professional sport in Britain 1875-1914 Cambridge, UK: Cambridge University Press Vrooman, John 1997 “A Unified Theory of Capital and Labor Markets in Major League Baseball” Southern Economic Journal, 63, 594-619 Vrooman, John 2000 "The Economics of American Sports Leagues" Scottish Journal of Political Economy, 47, 4, 364-98 29 Jan-97 30 Jan-03 Nov-02 Sep-02 Jul-02 May-02 Mar-02 Jan-02 Nov-01 Sep-01 Jul-01 May-01 Mar-01 Jan-01 Nov-00 Sep-00 Jul-00 May-00 Mar-00 Jan-00 Nov-99 Sep-99 Jul-99 May-99 Mar-99 Jan-99 Nov-98 Sep-98 Jul-98 May-98 Mar-98 Jan-98 Nov-97 Sep-97 Jul-97 May-97 Mar-97 £m Ap r-9 Ju l-9 O ct -9 Ja n97 A pr -9 Ju l-9 O ct -9 Ja n98 Ap r-9 Ju l-9 O ct -9 Ja n99 A pr -9 Ju l-9 O ct -9 Ja n00 Ap r-0 Ju l-0 O ct -0 Ja n01 A pr -0 Ju l-0 O ct -0 Ja n02 Ap r-0 Ju l-0 O ct -0 Ja n03 £m -9 O ct Fe 91 bJu 92 n9 O ct Fe 92 b9 Ju n9 O ct Fe 93 b9 Ju n9 O ct Fe 94 bJu 95 n9 O ct Fe 95 b9 Ju n9 O ct Fe 96 bJu 97 n9 O ct Fe 97 b9 Ju n9 O ct Fe 98 b9 Ju n9 O ct Fe 99 b0 Ju n0 O ct Fe 00 b0 Ju n0 O ct Fe 01 bJu 02 n0 O ct Fe 02 b03 Ju n £M Manchester United Market Value June 91- Feb 03 1200 16 clubs listed during this period 1000 800 600 400 200 Chelsea Market Value April 96-Feb 03 250 200 150 100 50 Sheffield United Market value Jan 97- Feb 03 40 35 30 25 20 15 10 £m 31 16 14 12 10 Aug-01 Jun-01 Apr-01 Feb-01 Dec-00 Oct-00 Aug-00 Jun-00 Apr-00 Feb-00 Dec-99 Oct-99 Aug-99 Jun-99 Apr-99 Feb-99 Dec-98 Oct-98 Aug-98 Jun-98 Apr-98 Feb-98 Dec-97 Oct-97 Aug-97 Jun-97 Apr-97 Feb-97 Dec-96 Sep-02 Jan-03 Nov-02 Birmingham Market Value March 97- Feb 03 30 25 20 15 10 Feb-03 Dec-02 Oct-02 Aug-02 Jun-02 Apr-02 Jul-02 Feb-02 Mar-02 May-02 Oct-01 18 Dec-01 West Bromwich Albion Market Value Jan 97 - Feb 03 Jan-02 20 Nov-01 Sep-01 Jul-01 May-01 Mar-01 Jan-01 Nov-00 Sep-00 Jul-00 May-00 Mar-00 Jan-00 Nov-99 Sep-99 Jul-99 May-99 Mar-99 Jan-99 Nov-98 Sep-98 Jul-98 May-98 Mar-98 Jan-98 Nov-97 Sep-97 Jul-97 May-97 Mar-97 Jan-97 £m M ar M -97 ay -9 Ju lSe 97 p No -97 vJa 97 nM 98 ar M -98 ay -9 Ju lSe 98 pNo 98 vJa 98 nM 99 ar M -99 ay -9 Ju lSe 99 pNo 99 vJa 99 nM 00 ar M -00 ay -0 Ju lSe 0 pNo 00 vJa 00 nM 01 ar M -01 ay -0 Ju lSe pNo 01 v0 Ja nM 02 ar M -02 ay -0 Ju lSe pNo 02 vJa n03 £m Sunderland Market value Dec 96- Feb 03 70 60 50 40 30 20 10 M ay -9 Ju lSe 97 pNo 97 v9 Ja nM 98 ar M 98 ay -9 Ju lSe 98 pNo 98 v9 Ja nM 99 ar M 99 ay -9 Ju lSe 99 pNo 99 v9 Ja nM 00 ar M 00 ay -0 Ju lSe 00 pNo 00 v0 Ja nM 01 ar M 01 ay -0 Ju lSe 01 pNo 01 v0 Ja nM 02 ar M 02 ay -0 Ju lSe 02 pNo 02 v0 Ja n03 £m Ap rJu 97 nAu 97 gO 97 ct De 97 cFe 97 b9 Ap rJu 98 nAu 98 g9 O ct De 98 cFe 98 b9 Ap rJu 99 nAu 99 g9 O ct De 99 cFe 99 b0 Ap rJu 00 nAu 00 gO 00 ct De 00 cFe 00 b0 Ap rJu 01 nAu 01 g0 O ct De 01 cFe 01 b0 Ap rJu 02 nAu 02 g0 O ct De 02 cFe 02 b03 £m M ar M -97 ay -9 Ju lSe 97 pNo 97 vJa 97 nM 98 ar M -98 ay -9 Ju lSe 98 pNo 98 vJa 98 nM 99 ar M -99 ay -9 Ju lSe 99 pNo 99 vJa 99 nM 00 ar M -00 ay -0 Ju lSe 00 pNo 00 vJa 00 nM 01 ar M -01 ay -0 Ju lSe 01 pNo 01 vJa nM 02 ar M -02 ay -0 Ju lSe 02 pNo 02 vJa 02 n03 £m Charlton Market Value March 97 - Feb 03 35 30 25 20 15 10 Newcastle Market Value April 97 - Feb 03 200 180 160 140 120 100 80 60 40 20 Aston Villa Market Value May 97- Feb 03 120 100 80 60 40 20 32 Jan-97 33 Jan-03 Nov-02 Sep-02 Jul-02 May-02 Mar-02 Jan-02 Nov-01 Sep-01 Jul-01 May-01 Mar-01 Jan-01 Nov-00 Sep-00 Jul-00 May-00 Mar-00 Jan-00 Nov-99 Sep-99 Jul-99 May-99 Mar-99 Jan-99 Nov-98 Sep-98 Jul-98 May-98 Mar-98 Jan-98 Nov-97 Sep-97 Jul-97 May-97 Mar-97 £m -9 Ju lSe pNo 97 v9 Ja nM 98 ar M 98 ay -9 Ju lSe 98 pNo 98 v9 Ja nM 99 ar -9 M ay -9 Ju lSe 99 pNo 99 v9 Ja nM 00 ar M 00 ay -0 Ju lSe 0 pNo 00 v0 Ja nM 01 ar M 01 ay -0 Ju lSe 01 pNo 01 v0 Ja nM 02 ar M 02 ay -0 Ju lSe 02 pNo 02 v0 Ja n03 M ay £m Oc tDe 97 c9 Fe b9 Ap r-9 Ju nAu g9 Oc tDe 98 c9 Fe b9 Ap r-9 Ju nAu 99 g9 Oc tDe 99 c9 Fe b0 Ap r-0 Ju nAu 00 g0 Oc tDe 00 c0 Fe b0 Ap r-0 Ju nAu 01 g0 Oc tDe 01 c0 Fe b0 Ap r-0 Ju nAu 02 g0 Oc tDe 02 c0 Fe b03 £m Nottingham Forest Market Value Oct 97 - Oct 01 (shares supsended) 35 30 25 20 15 10 Burnden Liesure (Bolton Wanderers) May 97 - Feb 03 60 50 40 30 20 10 Southampton Market Value Jan 97 - Feb 03 40 35 30 25 20 15 10 [...]... Chicago: University of Chicago Press Sloane, Peter 1971 "The Economics of Professional Football: The Football Club as a Utility Maximizer", Scottish Journal of Political Economy, 17, 2, 121-146 Szymanski, Stefan 2003 “The Economic Design of Sporting Contests” Journal of Economic Literature, forthcoming 28 Szymanski, Stefan and Tim Kuypers 1999 Winners and Losers: The Business Strategy of Football Viking... the directors of the listed clubs could not have done a lot more to bring their profitability into line with average of other clubs13 The decline in profitability also seems to be reflected in the changing market valuations of the clubs The market valuations of eleven of the clubs, on a monthly basis, are shown in the charts at the end of the paper What is clear is that market values of clubs analysed... players while presiding over declining profits The third explanation appears weak since whatever problems there may be in inferring the level of economic profits from accounting profits, it is reasonable to believe that changes in accounting profits are a good indicator in changes in economic profits over a reasonable period of time for a large enough sample of businesses, absent significant changes... The New Business of Football London: Macmillan Nickell S J (1981) ‘An investigation of the determinants of manufacturing employment in the UK’ Discussion paper No 105, Center for Labor Economics, London School of Economics Quirk, James and Rodney Fort 1992 Pay Dirt: The Business of Professional Team Sports, Princeton N.J.: Princeton University Press Scully, Gerald 1989 The Business of Major League Baseball... had higher profits before flotation, but the series is too short to make a reasonable comparison 12 The sample is not balanced, and there are about 6% more observations in the second half of the panel 13 There is quite a lot of variability in financial performance Manchester United, the largest and most profitable club by far is often cited as an outlier, but omitting them from the set of clubs whose... reaching the semi-final of the latter competition in 2001, only to fail to qualify for the following season and found themselves unable to fund their collection of star players Since that time they have been more or less forced sellers of large amounts of player talent It seems unlikely that any one explanation will furnish a conclusive explanation of the relative performance of the football clubs that... profit Playing success Figure 1: Profits as a function of club success profit Indifference curves for utility maximising owner Indifference curves for profit maximising owner Playing success Figure 2: Indifference curves for profit maximising and utility maximising owners 26 profits Indifference curves for utility maximising owner I0 I1 Indifference curve for profit maximising owner π(PM)* π(U)* S(PM)*... represent intrinsic differences in terms of productivity (the efficiency of turning player spending into performance) and revenue generating capacity (from a given level of support) Each team then has an objective function that is a weighted average of profits and performance: 14 (2) Ωit = λπit + (1-λ) Pit so that if, for example, λ = 1, the club cares only about profit Here we ask whether flotation might... omitting them from the set of clubs whose status did not change does not alter the profile of profitability that much Without Manchester United the 9296 average is a loss of £0.2m compared to a loss of £0.7m in the 97-01 period 11 (b) League performance Team performance could be measured in several ways Clubs compete in a number of sporting competitions- the domestic league, the FA Cup, The League Cup, and... shareholders were significant buyers at flotation of many of these clubs, and indeed it was the perception that this was the case that gave rise to many complaints from fans about the commercialisation of football (see e.g Conn (1997)) Morrow (1997) reports that “at its 1997 accounting year end 124 institutional shareholders owned almost 60 per cent of the ordinary shares in Manchester United” However,