Financial Viability and Competitive Balance in English Football
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Financial Viability and Competitive Balance in English Football by Stephanie Ashley Leach A thesis submitted for the degree of Doctor of Philosophy of the University of London and the Diploma of Imperial College August 2006 Tanaka Business School Imperial College University of London Abstract This thesis empirically examines the importance of competitive balance and how economic objectives and financial viability play a part in its impact on the demand for English football. Previous research in sports economics has been inconclusive in the desirability of competitive balance as well as how economic behaviour may affect its efficacy. Academic opinion is split in its assumptions about whether football clubs act as profit maximisers or utility (win) maximisers, which has a direct consequence on competitive balance and the policies used to promote it. An econometric test of a model of economic objectives in playing performance and revenue generation demonstrates that clubs heavily invest in playing talent to achieve those objectives. The results also show that the commercialisation of football in the 1990s did not appear to affect the achievement of a club's goals, nor did it appear to harm competitive balance. However, the failure to obtain the objectives relative to wage spending and pitch performance do impose a risk on the financial viability of a club and without the proper adjustment mechanisms in place can harm competitive balance. The results also show that clubs demonstrate some evidence of profit maximising behaviour which implies some policies used to promote competitive balance will be ineffective. The optimality of perfect competitive balance itself is questionable and econo- metric tests on match attendance sensitivity to win percentage suggest that a more dispersed distribution of wins would maximise attendance and profits. The results indicate that polices used to promote more competitive balance above the nonco- operative Nash equilibrium would harm attendance. Lastly competitive balance itself is shown to be complex. Using television au- dience data, a test of the outcome uncertainty hypothesis indicates that it is not pure uncertainty that matters but rather a combination of excitement and potential outcomes which affects demand throughout the game. Acknowledgements I would like to first and foremost thank Professor Stefan Szymanski for his input, guidance, assistance, and patience during my research, especially for the joint work we put into Chapter 3, Chapter 5 and Chapter 6. I would also like to extend my gratitude to Dr. Tommaso Valletti for his useful comments and suggestions. Many thanks to Prof. Stephen Hall for his contribution and advice in Chapter 3. I am deeply indebted to my mother, Debbie, father Ben, brother, Ashley and partner Dr. Stratos "BP" Rappos. You all have been wonderful and without you this would not have been possible. A special thanks goes to Alex Phillips of UEFA, and Mark Oliver of Oliver & Ohlbaum for their support and interest in my work. I would also like to thank those at Initiative-London, in particular Kevin Alavy and Alison Gaskell, for their input into Chapter 6. I also am grateful to my colleagues: Dr. Mariam Harfush-Pardo Zero Cerdo Mayor del Barrio (otra ves!). Dr. Ala'a Shehabi, Eleanor Russell, Michalis Makromi- nas, Jair "Poncharello" Muhoz, Dr. Helene "M25" Pinol, Dr. Marwan Fayad, Alexander "Gringo" Thompson, Dr. Jorge Gomez Perales, Dr. Ah, Wendy and J. T. Aleyd, Barbara Russell, Fiona Pashazadeh, Matthew Bowhill, Carolina Abreu, Dr. Iraki is Papageorgiou, Dave Shipley, Shiri Rosental, Kristin O'Connor-Leung and Lisa Vandergalien-Smart. Finally I would like to thank Juhe Paranics, Gail HaUissey, Lisa Rose, Prof. John Goddard, Prof. Ruud Koning and the Battersea Dogs Home for their support and encouragement. Contents Abstract 2 Acknowledgements 3 List of Figures 9 List of Tables 11 Notation and Acronyms 15 1 Introduction 16 1.1 Economics Within Sport . 16 1.2 Football in England 18 1.3 Contribution and Motivation of Thesis 19 1.4 Outline of Thesis 21 2 Established Theory and Literature 22 2.1 Competitive Imbalance 23 2.1.1 Money and Success 23 2.2 Influence on Demand 26 2.2.1 Match Uncertainty 26 2.2.2 Seasonal Uncertainty 27 2.2.3 Long-Run Uncertainty 27 2.2.4 Measuring Outcome Uncertainty and Competitive Balance . 28 2.2.4.1 Outcome Uncertainty Measures 28 2.2.4.2 Competitive Balance Measures 29 2.2.5 Measuring Demand 29 2.3 Policy Issues and the Invariance Principle 30 2.3.1 Profit Maximising Assumption 30 4 CONTENTS 5 2.3.2 Utility Maximising Assumption 31 3 Making Money Out of Football 33 3.1 Introduction 33 3.2 Ownership in English Football 38 3.2.1 Traditional Ownership 38 3.2.2 New Ownership and Market Floatation 39 3.2.2.1 First Movers 39 3.2.2.2 Mid-1990s Boom 40 3.3 Profit Maximisation Versus Utility Maximisation 42 3.3.1 Profit-Maximisers 42 3.3.2 Win Maximisers 43 3.4 Theoretical Aspect 43 3.4.1 Impact of Floatation 43 3.4.2 Changes in Objectives 45 3.4.3 What Can We Measure Empirically 46 3.5 Data 47 3.5.1 Club Data 47 3.5.2 Summary Statistics for Clubs that Floated 48 3.5.2.1 Variable Definitions 48 3.5.2.2 Descriptive Statistics 48 3.6 Methodology 53 3.6.1 Regression Analysis 53 3.6.2 Panel Data 55 3.6.3 Error Correction Model 55 3.7 Results 57 3.7.1 Error Correction Estimates 57 3.8 Discussion 59 3.8.1 Has Anything Changed 59 3.9 Additional Tables for Chapter 3 63 4 Economic Objectives, Adjustment and Financial Viability: An Empirical View 74 4.1 Introduction 74 4.1.1 Success and Failure 75 4.2 Labour Market in English Football 77 CONTENTS 6 4.2.1 History of the Labour Market 78 4.2.2 Transfer Windows 80 4.3 Classifying and Defining Financial Distress 81 4.3.1 Predicting Distress 82 4.3.2 Reaction to Financial Distress 83 4.4 The Economic Model 85 4.4.1 The Data 86 4.4.2 Dynamic Equilibrium and the Error Correction Mechanism . 87 4.4.3 Performance and Probability of Distress: Limited Dependent Variable Analysis 89 4.4.3.1 Audit Opinions 89 4.4.3.2 Credit Scores 90 4.4.3.3 Ordered Probit Model 91 4.4.4 Adjusting to Deviation and Distress: Panel 93 4.5 Results and Discussion 95 4.5.1 Results of Error Correction Model 95 4.5.2 Results of Financial Distress Model 95 4.5.3 Results of Wage Adjustment Model 96 4.6 Discussion and Summary 98 4.7 Additional Tables for Chapter 4 100 5 Level Playing Field 110 5.1 Introduction 110 5.1.1 Winning and Performance 110 5.1.2 Previous Work 113 5.1.2.1 Competitive Balance 113 5.1.2.2 Attendance 117 5.2 Theoretical Background 120 5.2.1 Model Structure 120 5.2.2 Proposition . 122 5.2.3 Proof 122 5.3 Empirical Evidence 124 5.3.1 Measures of Competitive Balance 124 5.3.2 Win Percentages 124 5.3.3 Football League 125 CONTENTS 7 5.3.4 Data Overview 126 5.3.5 Methodology 130 5.3.5.1 Stationarity 131 5.3.5.2 Basic Model 133 5.3.6 Dynamics 134 5.3.7 Estimated Model 134 5.4 Results 137 5.4.1 Sensitivities 137 5.4.2 Optimal Win Percentages 137 5.4.3 Simulation of League 139 5.4.3.1 Second Tier 139 5.4.3.2 Perfectly Balanced League — Tier 2 139 5.4.3.3 Third Tier 144 5.4.3.4 Fourth Tier 145 5.5 Discussion and Conclusion 147 5.5.1 Implications 147 5.5.2 Caveats 148 5.5.3 Further Research 149 5.5.4 Summary 150 5.6 Additional Tables for Chapter 5 151 6 Television Viewership 178 6.1 Introduction 178 6.2 Data 1 180 6.2.1 Description 180 6.3 Demand and Outcome Uncertainty 186 6.3.1 Testing Outcome Uncertainty 186 6.3.2 Television Ratings 188 6.4 Methodology 189 6.4.1 Stage 1 — Probability Model 189 6.4.2 Stage 2 — Viewership Model 194 6.5 Results 196 6.5.1 Regression Estimation 196 6.5.2 Explanatory Power of Viewership Model-Actual Matches . 204 CONTENTS 8 6.5.3 Size of the Impact of Outcome Uncertainty on Viewership- Simulations 208 6.6 Discussion and Conclusions 214 6.7 Additional Tables for Chapter 6 217 6.7.1 Definitions 217 6.7.2 Television Terminology 217 7 Conclusions 218 7.1 Summary and Contribution of Thesis 218 7.1.1 Economic Objectives and Behaviour 218 7.1.2 Financial Adjustment and Viability 219 7.1.3 Optimal Win Distribution and Perfect Balance 220 7.1.4 Demand for Football on TV and Outcome Uncertainty . 220 7.2 Further Research 221 References 222 List of Figures 3.1 Graphical Correlation of Position and Wages in English Football 1991-2004 54 3.2 Graphical Correlation of Revenue and Position in English Football 1991-2004 54 4.1 Equilibrium Mechanism: Performance and Wages 96 4.2 Equilibrium Mechanism: Revenues and Position 97 5.1 Attendance and Capacity Utilitisation in First Tier Enghsh Football 1977-2004 127 5.2 Total Attendance and Capacity Utilisation in Second Tier English Football 1977-2004 128 5.3 Total Attendance and Capacity Utilisation in Third Tier English Football 1977-2004 128 5.4 Total Attendance and Capacity Utihsation in Fourth Tier English Football 1977-2004 129 6.1 Distribution of First Goal Scored in Games Broadcast 2002-2005 .