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Strategic and Financial Implications of UEFA's Financial Fair Play

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Strategic and Financial Implications of UEFA's Financial Fair Play Master Thesis Finance & Strategic Management Strategic and Financial Implications of UEFA’s Financial Fair Play Regulations A Comparative Study of Commercially Mature and Immature Football Clubs Herman Schüller Martin Withammer 93385 116490 Supervisor: Sven Junghagen Date of submission: 15th May 2019 Number of Pages: 107 Number of Characters: 238.731 (incl. spaces) ABSTRACT Accelerating insolvency and extreme debt levels in the European football landscape necessitated action from the governing body UEFA to preserve the financial health of professional football clubs. Consequently, the Financial Fair Play Regulations (FFP) were introduced to overcome these issues and strengthen the credibility of the sport. Whilst previous literature has concentrated on the impact of the FFP in relation to elite clubs in the Big-5 European football leagues, there has been less attention towards Scandinavian clubs trying to compete at the highest level. To illustrate how football clubs are controlled and how they handle FFP, we develop a theoretical framework designed for comparing football clubs in both governance and financial spheres. The study utilizes a qualitative research method by conducting semi-structured in-depth interviews with executives in Scandinavian top clubs. Furthermore, we compare our findings with empirical data from commercially mature clubs in the Big-5 leagues, which contributes to the increasing amount of scholarly work on FFP. Our findings demonstrate that a formal governance mechanism such as FFP has a larger impact on elite clubs compared to the Scandinavian ones for two distinct reasons. Firstly, the necessity of formal governance mechanisms increases as football clubs become more complex and business- oriented. Secondly, informal governance mechanisms such as culture and societal values are more noticeable regarding how Scandinavian clubs are controlled. Moreover, our results indicate that FFP has not fully worked as intended, as its “break-even requirement” has contributed in isolating an elite group of clubs getting richer at a higher speed compared to non-elite clubs. This competitive gap and newly discovered data tells a two-fold story for the future of commercially mature and immature clubs respectively. While the commercially mature clubs are likely to isolate themselves by compressing their competitive environment and enhancing their global strategies, Scandinavian clubs need to intensify their talent development strategies and be proactive in new technologies that can attract young people and strengthen their local adaption. However, it is difficult to determine the exact impact of FFP, because numerous factors have contributed to enhance the financial and competitive disparities between clubs. The trend is undisputable, and the question is whether or not the industry is adequately designed to face contingencies that are disrupting football’s competitive balance and romantic vision. 2 Contents 1. INTRODUCTION .......................................................................................................................................... 5 1.1 Background ................................................................................................................................................. 5 1.2 Topic Delimitation and Research Question ................................................................................................ 7 1.2.1 Sub-Questions ...................................................................................................................................... 7 1.3 Motivation .................................................................................................................................................. 8 2. THEORETICAL FRAMEWORK ................................................................................................................ 9 2.1 Governance Theory .................................................................................................................................. 10 2.2 Formal Governance Mechanisms ............................................................................................................. 11 2.2.1 Ownership Structures, Identity and Models ...................................................................................... 11 2.2.2 Theory on Inter-functional conflicts .................................................................................................. 13 2.3 Informal Governance Mechanisms ........................................................................................................... 15 2.3.1 Culture ............................................................................................................................................... 15 2.3.2 Quinn and Cameron’s Competing Values Framework for Organizational Culture ........................... 17 2.4 Financial Accounting Theory and Inflation .............................................................................................. 19 2.4.1 Inflation ............................................................................................................................................. 19 2.4.2 Accounting flexibility in the Income Statement ................................................................................ 20 2.4.3 Methods of Accounting for player registrations ................................................................................ 21 2.5 Sport Economics Theory .......................................................................................................................... 22 2.5.1 Competitive Balance and the Louis-Schmelling Paradox ................................................................. 22 2.5.2 How to Achieve Competitive Balance .............................................................................................. 22 3. LITERATURE REVIEW ............................................................................................................................ 23 3.1 The Changing Nature of Governance in the European Football Landscape ............................................. 23 3.2 Financial Fair Play: A Basic Overview .................................................................................................... 26 3.3 How the Football Business differs from Traditional Business ................................................................. 29 3.4 Related Work and Previous Research ....................................................................................................... 31 3.4.1 Previous Research on Ownership and Culture in Sport across Countries ......................................... 31 3.4.2 Previous Comparative Studies of European Football Leagues and Clubs ......................................... 34 3.4.3 Previous Research on the Financial Fair Play ................................................................................... 35 3.4.4 The Need for a New Perspective ....................................................................................................... 37 4. RESEARCH METHODOLOGY ................................................................................................................ 37 4.1 Research Design ....................................................................................................................................... 37 4.2 Research Approach ................................................................................................................................... 38 4.3 Data Collection ......................................................................................................................................... 39 4.4 Research Limitations ................................................................................................................................ 41 5. EMPIRICAL FINDINGS & COMPARATIVE ANALYSES ................................................................... 44 5.1 General Overview of the Semi-Structural In-depth Interviews ................................................................ 44 5.1.1 Similarities in the Data ...................................................................................................................... 45 3 5.1.2 Differences in the Data ...................................................................................................................... 48 5.2 Opinions about FFP from a Club Perspective ........................................................................................... 50 5.2.1 A Scandinavian Perspective .............................................................................................................. 50 5.2.2 An Elite Club Perspective.................................................................................................................. 51 5.3 Ownership Mechanisms in the Selected Clubs ......................................................................................... 52 5.3.1 Ownership Objectives: Purpose and Mission .................................................................................... 52 5.3.2 Differences in Ownership Structures and Identities .......................................................................... 54 5.3.3 Scandinavian Opinions on Ownership and its Influence on Competitiveness ................................... 57 5.3.4 Impact of Stock Market Ownership and Foreign Private Ownership on Big-5 Leagues ................... 58 5.4 Culture in the Selected Clubs ..................................................................................................................
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