Making Money Out of Football
| Author | Stefan Szymanski,Stephanie Leach |
| Published date | 01 February 2015 |
| Date | 01 February 2015 |
| DOI | http://doi.org/10.1111/sjpe.12065 |
MAKING MONEY OUT OF FOOTBALL
Stephanie Leach* and Stefan Szymanski**
ABSTRACT
In the US, most economists argue that professional sports teams are profit-maxi-
mising businesses, but it is a widely held view in Europe that professional foot-
ball clubs are not run on a profit-maximising basis. This belief has important
implications for the impact of widely-advocated policy measures, such as revenue
sharing. This paper looks at the performance of 16 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, under the assumption that investors were attracted to these football clubs
to earn a positive return. This paper finds no evidence of any shift in the behav-
iour of these 16 clubs after flotation. This result is consistent with the view that
football clubs in England have been much more oriented toward profit objectives
than is normally assumed.
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, p. 154
II
NTRODUCTION
In North America it is commonplace, especially among economists, to think
of the owners of professional sports teams as profit maximisers (Fort and
Quirk, 1995). In Europe, however, this assumption has been treated somewhat
sceptically. In an influential paper, Sloane (1971) argued that a plausible char-
acterisation 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 foot-
ball clubs and the opinions expressed by club officials. In some countries,
football clubs are organised as sporting associations which have no sharehold-
ers, but in England all professional clubs are limited companies, and most
have been so for around 100 years. Empirical and theoretical research exists that
*UEFA
**University of Michigan
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12065, Vol. 62, No. 1, February 2015
©2015 Scottish Economic Society.
25
attempts to test the competing hypotheses of profit and utility maximisation in
sports, but this literature neither offers a firm conclusion nor clearly estab-
lishes evidence supporting one hypothesis over the other.
In order to add to the existing literature on objective functions in sport, this
study focuses on sixteen English football clubs that came to be traded on the
London Stock Exchange in the mid-1990s. For the most part, public trading of
these clubs arose through share placings and offers for sale of up to 100% of the
share capital. The main hypothesis is the following: 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 club’s objectives, assum-
ing that investors in publicly quoted corporations are interested primarily in
financial returns. To test the main hypothesis, this paper examines several
different aspects of performance for these sixteen clubs before and after their
flotation. The results indicate that changes in the measured performance of
these clubs do not seem to be consistent with a shift toward more profit-oriented
objectives. That is, flotation appears to have had little or no observable effect
on the maximising behaviour of these 16 clubs that raises capital in the stock
market. This paper explores possible interpretations of the empirical results.
II THE IMPACT OF FLOTATION
The significance of objectives for league policy
The identification of a firm’s objective function is central to understanding its
behaviour, and this is more than usually crucial when it comes to understand-
ing sports clubs and leagues. Members of sports leagues typically enter into a
wide range of restrictive agreements such as revenue sharing, limitations on
players spending (salary caps and roster limits), and restrictions on player
mobility. These restraints, or so the team owners claim, are necessary to pre-
serve 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 com-
petitive balance will be negligible or non-existent. The assumption of profit
maximisation is critical to the validity of these claims with respect to competi-
tive balance, as has been shown in work of K
esenne (1996, 2000).
Consider, for example, the case of collectively sold broadcast rights. In the
North American sports leagues, the income derived from collective sale is typi-
cally divided equally among the teams. What effect will collectively-sold rights
have on behaviour as 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 substantially 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
26 STEPHANIE LEACH AND STEFAN SZYMANSKI
Scottish Journal of Political Economy
©2015 Scottish Economic Society
To continue reading
Request your trial