Entry into exit: insolvency in English professional football

AuthorStefan Szymanski
Publication Date01 Sep 2017
Stefan Szymanski*
This study uses a unique database of financial accounts for English football clubs
between 1974 and 2010 to examine the process by which firms fail, which in this
context means entering insolvency proceedings. From the data it is possible to
estimate shocks to demand and productivity and to show that failing firms typi-
cally experience a series of negative shocks. This is consistent with the standard
IO theory models of exit.
The reason that firms fail is an important question in management, business
and economics. The standard economic view since (at least) the work of Jova-
novic (1982) and Hopenhayn (1992) is that the forces underlying firm failure
and the decision to exit from a competitive industry are driven by random
shocks. Empirical studies of bankruptcy and exit have focused on the charac-
teristics of firms that fail and the effect on industry returns, innovation and
product market competition. However, due to lack of data most previous
studies have not modelled the competitive process among all the firms within
an industry to identify the causes of failure of some of them. The contribution
of this study is to use market and financial data from a specific industry to
model the process of competition and identify the “shocks” which affect firms;
empirical estimates are derived and it is shown that these do indeed increase
the probability of failure.
The industry is English professional football. It consists of around 100
competitors whose performance is measured weekly through the process of
league competition. Outcomes are measured with perfect accuracy (teams win,
lose or draw). Team revenues and investments (primarily in players) are a
matter of public record. Failure is commonplace, and firms enter administra-
tion (the UK equivalent of Chapter XI) at officially recorded dates.
In the study the competitive process is modelled based on the relationship
between (a) team performance (in terms of league position) and wage expendi-
tures (mostly devoted to hiring playing talent) and (b) club revenues and team
*University of Michigan
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12134, Vol. 64, No. 4, September 2017
©2017 Scottish Economic Society.
performance. This study shows that failure can be identified with idiosyncratic
shocks both to productivity (the wageperformance relationship) and to
demand (the performancerevenue relationship). A shock in this sense is mea-
sured as the difference between the fitted values for each of these relationships
and the realized values. The probability of failure increases significantly when
firms experience a series of negative shocks.
The study also has relevance to policy debates within the football industry.
In recent years concerns about financial failure have led to increased pressure
for regulation of budgets, culminating in the Financial Fair Play rules intro-
duced by the European governing body (UEFA) in 2009.
The next section reviews the relevant literature. There follows a description
of the organization of English football, the insolvency process in England and
a simple model of insolvency. Section 4 describes the data and the regression
results, section V concludes.
The causes of business failure are of longstanding interest. In the 1980s econo-
mists started to develop optimizing models which could account for the
observed patterns of exit from an industry, e.g. Jovanovic (1982), Hopenhayn
(1992), Ericson and Pakes (1995). These models rely on the notion of idiosyn-
cratic shocks which affect the firm’s perception of its true productivity. In this
world, exit is rational once perceived productivity falls below some threshold
value. Estimation of structural models is challenging, but an early example is
Olley and Pakes (1996) on telecommunications equipment and recent industry
studies include Dunne et al. (2013) (dentists and chiropractors) and Collard-
Wexler (2013) (ready-mix concrete). This study is related to this literature in
that it estimates a structural model of competition using data on almost all
firms in an industry to identify shocks that cause some firms to fail.
There is also a large literature on the estimation of exit probabilities using
reduced form models with both multi-industry datasets, e.g. Dunne et al.
(1988), Disney et al. (2003), Honjo and Harada (2006), Esteve-P
erez et al.
(2010), Fackler et al. (2013), Lee and Mukoyama (2015), and industry-specific
datasets, e.g. Airlines (Joskow et al. (1994)) and grocery retailing (Hosken
et al. (2016)). The main findings are that the probability of exit tends to
decrease with firm size and that the relationship between firm age and turn-
over is often U-shaped, with both very young and very old firms at higher risk
than middle-aged firms. In general, these studies are based on large-scale
industrial surveys, and although it is possible to group firms into broad indus-
try categories (e.g. using the Standard Industrial Classification), in most cases
it is not possible to identify all of the direct competitors among failing and
non-failing firms.
As Schary (1991) pointed out, exit can occur for many different reasons,
including merger, voluntary liquidation and bankruptcy. In this study “exit”
takes the form of entry into the legal process of administration. Administra-
tion is a legal process in the United Kingdom which allows insolvent firms to
Scottish Journal of Political Economy
©2017 Scottish Economic Society

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