Is there a financial`fairness’ gap in English football ?

With the curtain closed on the 2014/15 Premier League season, the oligarch funded Chelsea reign supreme, looking over the shoulders at new money Manchester City.  This season also sees another Russian owner, Maxime Demin, financially facilitate Bournemouth’s emergence from the Championship wings to trip the boards on the main Premiership stage next season.  This emergence can also be attributed to Eddie Howth, Bournemouth’ young critically acclaimed manager, who has provided the vital strategic input for the playing success of the team. Bournemouth’s path to the top has be frought with financial instability, including entering into insolvency proceedings in 2008.  But will Bournemouth’s rise be fleeting and the struggle to stay up result in an overspend well beyond the income that they generate ?

Set against this backdrop is the continuing imposition of the Financial Fair Play (henceforth FFP) regulation by UEFA, whose controversial break-even rule is in reality an attempt to impose a measure of financial ‘fairness’ or efficiency on European Football clubs 1. Although recently it has emerged that there may be a softening of these rules, to date there have been 23 European clubs which have entered into settlements with UEFA as a result of the break even rule 2.

Myself and my colleague, Ronan Gallagher, are taking a professional interest in this financial regulation.  Academia (Sloane 1971; Késenne 1996; Garcia-del-Barrio & Stefan Szymanski 2009)  has long been aware that the business of football is best explained as maximising wins while just maintaining financial solvency although their financial (mis)management regularly makes headline news.  To this end we calculate one accounting measure of financial efficiency which is used to assess how effectively an institution can turn its spending into income.  Figure 1 displays the average wage to turnover ratio (%) along with 95% confidence intervals 3 for the Premiership and Championship clubs over the 2002/03-2013/14 period.  This one-dimensional measure of a club’s productivity has some major weakness4, but its exposition below illustrates some interesting features prevalent in the English game 5.

Figure 1

WTr1

Firstly financial inefficiency, as measured by higher wage to turnover ratios,  has grown over the 2002/03-2012/13 period. This rising inefficiency is set against a backdrop of significant aggregate income growth of UEFA footballs teams of 45% 6 while European economies as a whole languished in a stagnant 1% growth period (Morrow ,2014).  Secondly, the 2013/14 season has seen a dramatic drop in financial efficiency especially in the Premiership.  This can largely be explained by two factors: 1) 2013/14 season was the first time club’s were subject to the Premier League’s Short Term Cost Control measure and also the first time that some club’s where subject to UEFA’s FFP break-even requirement; 2) 2013/2014 season seen a 29% year-on-year increase in total league revenue driven mostly (78% of the total increase) by the the first year of a new broadcasting rights package.7 .  Finally, there is a clear financial efficiency gap between the average Premiership and Championship club, with the latter having unsustainably high wage bills in the last few seasons (wage to turnover ratios of over 100%).  Furthermore, given the 95% confidence bands, this difference has become statistically significant from the 2007/08 season onward.8

In a recent paper, Goddard (2014) argues that this gap is likely due to the opening of competition through the promotion and relegation system.  He argues this system has a detrimental effect on profitability, owing to the pervasive tendency to overspend in an effort to achieve promotion or avoid relegation.  He points to the two tier system in English football as a point in case, where promoted teams fail to survive in the Premier league for more than one season, while regulated teams commonly experience financial duress upon arrival in the Football league.  Table 2 provides some evidence to suggest this is true.

Table 2 Financial efficiency implications for promotion and regulation for seasons 2002/03 to 2013/14.

 Mean Wage to Turnover Ratio (%)Standard ErrorLower 95% Confidence IntervalUpper 95% Confidence Interval
Promoted Clubs
Year Before78.03.670.585.4
Promotion Push Year 112.56.699.2125.8
Year After58.11.754.861.5
Relegated Clubs
Year Before89.35.278.799.8
Avoid Regulation Year66.13.359.372.9
Year After81.94.872.191.6

These results confirm that the club’s promotional push involves an unsustainable overspend, illustrated by an average wage to turnover ratio of 112.5% in the promotion push year. Furthermore the immediate revenue boost to these newly promoted clubs is evidenced by the dramatic and statistically significant drop in financial efficiency one year after their promotional campaign.  In contrast, relegated clubs experience a deterioration in financial efficiency the year they move into the Championship, indicated by an increase in the average wage to turnover ratio to 81.9% in that year.

While this preliminary analysis has some strong statistical health warnings we can attempt to provide some context to these findings.  The Premiership clubs are more efficient than Championship clubs because the TV money and associated sponsorship monies is a financial game changer.  Furthermore, the dramatic improvement in financial efficiency in 2013/14 is likely to be sustained with the dampening effect of cost control regulations extending beyond season 2015/16.  Therefore, clubs will bust a gut to get there and stay there.  Getting there takes a significant increase in financial input per unit output (i.e. a rise in your inefficiency in the year in which you go on the promotion push).  It’s a “go big or go home” scenario and many clubs fail to turn their spend into adequate points to ensure premiership survival.  Those that do “reach escape velocity” and stay in the premier league (e.g. the Stokes and Swanseas of the footballing world) ultimately achieve better long run efficiency but it’s high stake poker with more causalities than millionaires.

So Bournemouth’s (and indeed all the promoted teams) fight to survive (or perhaps thrive) in next season’s Premiership will provide for some interesting challenges for their future financial stability/efficiency.

Stata Code to create graph

References

Peeters, T., & Szymanski, S. 2014. Financial fair play in European football. Economic Policy, 29(78), 343–390. doi:10.1111/1468-0327.12031

Garcia-del-Barrio, Pedro, and Stefan Szymanski. 2009. “Goal! Profit Maximization Versus Win Maximization in Soccer.” Review of Industrial Organization 34 (1). Springer US: 45–68.

Goddard, John. 2014. “The Promotion and Relegation System.” In Handbook on the Economics of Professional Football, edited by John Goddard and Peter Sloane, 23–40. Edward Elgar Publishing.

Késenne, S. (1996). League management in professional team sports with win maximizing clubs. European Journal for Sport Management, 2(2), 14–22.

Morrow, Stephen, and Morrow Stephen. 2014. “Football Finances.” In Handbook on the Economics of Professional Football, edited by John Goddard and Peter Sloane, 80–99. Edward Elgar Publishing.

Sloane, Peter J. 1971. “THE ECONOMICS OF PROFESSIONAL FOOTBALL: THE FOOTBALL CLUB AS A UTILITY MAXIMISER.” Scottish Journal of Political Economy 18 (2): 121–46.

 

  1. See Syzmanski & Peeters (2014) paper for an excellent empirical exposition of this
  2.  Daniel Geey’s has a nice exposition of these settlements as well as a country breakdown
  3. based on a t distribution to account for small sample bias
  4. a) It assumes constant returns to scale. b) It doesn’t capture the non-profit nature of football clubs; for decades the economic study of football teams has long believed that they are run on a non-profit basis, a more appropriate model being win maximisation contingent on some budget constraint.  c) It suffers from the Fox’s paradox problem; a team could be partially efficiency in a number of areas but overall still performing poorly
  5. A notably, if obvious, feature that is illustrated by this simple ratio is highly labour intensive nature of the football business.  This is a feature of all sporting sectors
  6. According to Deloitte Annual Football Review data for the 2006-2010 period
  7. Information was taken from the  Deloitte Annual Review of Football Finance 2015
  8.  Generally when comparing to parameter estimates, such as sample means, it is always true that if their confidence intervals do not overlap then the statistics are significantly different. This simplistic statistical finding comes with some important caveats.  We assume that the mean are from independent sample and are approximately distributed normally.  The t distributions does help with some small sample bias but not with the independence assumption.