Financial Fair Play: a critical review Name: Joris Hoogenbos Student number: 10288481 Specialization: Economics and Finance Supervisor: dhr. Maximilian Hoyer Semester: Second Year: 2014/2015 Statement of originality 1 I hereby declare that this submission is my own work and to the best of my knowledge, it contains no material previously published or written by another person, nor material which to a substantial extent has been accepted for the award of any other degree or diploma at any educational institution, except where due acknowledgement is made in the thesis. Abstract 2 UEFA, the governing body of European football, introduced Financial Fair Play, which is about improving the overall financial health of European club football. UEFA has conceived a set of regulations, in order to restore the competitive balance in the game of football. Clubs will be punished by UEFA, when they violate those regulations. In this research, the effect of the introduction of Financial Fair Play is analyzed. At first, the details and implications of Financial Fair Play are analyzed. This paper contains a literature review on the effectiveness of Financial Fair Play, as well as an empirical research on that matter. The empirical part researches the numerical effect of the introduction of Financial Fair Play on the total of earned points of the teams in the Premier League. This research shows that the achievements of the introduction of Financial Fair Play are not what they hoped for as of yet. Contents 3 1. Statement of originality 2 2. Abstract 3 3. Contents 4 4. List of figures 5 5. Introduction 6 6. Literature review 9 7. Methodology 17 8. Results 22 9. Discussion of errors 27 10. Conclusion 29 11. References 31 12. Appendix 33 List of figures 4 1: Champions League prize money 14 2: Prize money finalists UEFA Champions League 2015 15 3: Top 10 highest salaries football players 18 4: Test for multicollinearity 22 5: Fixed effects model 23 6: Results coefficients 25 Introduction 5 Football is a sport that was officially played for the first time in the year 1863. Approximately 265 million people played the game in 2006 (per: FIFA.com). Football was played in over 200 countries at the start of this century. According to the Fédération Internationale de Football Association (FIFA) approximately 1.4 billion people are believed to have an above average interest in the game of football, with a total of 26 billion combined television spectators at the World Cup of 2010, with the tournament taking a single month. These numbers make football the most popular sport worldwide, according to Encyclopædia Britannica. Europe is the center of the football world, producing the greatest footballing talents and attracting the greatest talents of the other continents to play there. Most players want to play in Europe because of the high wages being paid and the rich history of the clubs in this continent and with that the prestige of filling in the boots of the greatest to ever play the game. The thing that really changed football from a game into the business it is today, are the large amounts of money that injected into it. In the last two decades the development of broadcasting technologies has expanded the reach and increased the income levels of European clubs at an extraordinary rate, and yet the financial state of European professional clubs seems to be depreciated (Peeters & Szymanski, 2014). In short, the biggest clubs of the biggest sport in the world are losing money. How this is possible, and how the Union of European Football Association (UEFA) is trying to solve this problem, will be researched in this paper. In Europe, a heavy discussion is going on about the finances in the game of football. Examples of affairs, which people seem to have a problem with, are the growing presence of oil sheiks in football. Critics speak about unfairness in the game of football, because some teams have more possibilities in buying players, developing youth players and solving debt, just because of the fact that they are run by a wealthy owner. “Many fans complain that it is unfair that wealthy owners are able to ‘buy’ a championship simply by using their financial muscle.” (Peeters & Szymanski, 2014). Schubert and Könecke (2015) even compare Financial Fair Play and the World Anti-Doping Code; they opt for the term “financial doping”. Another unfairness is the difference in rules between countries. For example, in Holland a club can lose its license to be a professional football club over a debt that is considerably lower than the existing debts 6 of football clubs in other countries, which are still allowed to buy in new players. For example, HFC Haarlem was declared bankrupt over a debt of 1,8 million euros (per Algemeen Nederlands Persbureau), while the likes of Real Madrid and Fc Barcelona hold debts over 200 millions euros (per Daily Mail), and they are still allowed to exist and even buy in new players for prices over 80 million euros per player. In defense of Real Madrid and FC Barcelona: a company or football club has to be able to pay off the debt eventually and those companies seem to be able to do that. The debt of Real Madrid and FC Barcelona is more solvable than the debt of HFC Haarlem. Also, some clubs are more than a football club and have to be kept alive, because the country of the club and the UEFA itself gain from the existence of those teams in their leagues. In this paper we examine whether the introduction of the Financial Fair Play regulations have increased competitive balance in the most important competitions in Europe. We examine whether the break-even rule has changed the competitive balance of the game. The effect of the introduction Financial Fair Play on the wage to turnover ratio will be examined. We develop a fixed effects model using observational study data to determine whether violating clubs earn better results after the introduction. The fixed effects model is a statistical model used in econometrics and statistics. The model shows observational data on quantities with explanatory variables, which are considered like non-random quantities. This will lead to the following research question: Has the introduction of Financial Fair Play had an impact on the violating football clubs’ results? Hypothesis: The introduction of Financial Fair Play has no impact on the results of the violating football clubs. The next section will be a literature review on the exact regulations, objectives and results of Financial Fair Play. The section thereafter will cover the research method, which will show how and why this research was implemented. After that, a new section will show the research results that are obtained, which answers our research question 7 and can test the hypothesis. The next section features a discussion of the results will be presented. In the last section, there will be a conclusion and recommendations for further researches. Literature Review 8 This literature review will contain why Financial Fair Play was implemented and it provides an insight about the objectives the UEFA held, when it was decided that Financial Fair Play was going to be implemented. The regulations that are used to reach these objectives are also discussed. Furthermore, we will use the available literature to investigate whether the introduction of Financial Fair Play has really had its effect and we will get an insight about the question whether it will or will not work in the future. Financial problems Financial Fair Play was introduced because European football suffers from financial problems. Many clubs are having trouble with their finances. The UEFA showed in their financial report in 2012 that 63% of the clubs that play in the highest competition in their country, reports an operating loss. 55% of the clubs show a net loss. 38% have reported a negative net equity. Chester (1968, p.45) saw the financial deterioration of the football world really early. Chester stated that some clubs were already near bankrupt. He asked the question; who will pay off the accrued deficits and whether those clubs will survive their debts. Examples of financial problems are the cases of Saint Etienne in 1982, Bordeaux in 1991 and Marseille in 1993, all in France (Gouguet & Primault, 2006, p. 49). Ascari & Gagnepain (2006, p.78) write about Spanish clubs owing large amounts of tax money, in which cases the clubs were not able to pay the debts off. The most recent example is from Italy. FC Parma, a historical team that won three European titles, was declared bankrupt after not being able to pay the players’ wages since July last year. FC Parma will be relegated to Serie D, which is not considered professional football (via: Entertainment and Sports Programming Network, ESPN). Financial Fair Play’s objectives and regulations The UEFA, the administration body for association football in Europe, noticed that some clubs are in a poor financial state and that some other clubs make use of so-called “Sugar Daddies”, which can be described as wealthy owners that use their own finances to buy in talented players and eventually championships (Peeters & Szymanski, 2014). These events made ‘The Beautiful Game” less fair in terms of competitive balance. For this reasons, Financial Fair Play (FFP) was introduced. There are not many papers written about this particular subject so far, making it difficult to see the results in the 9 competitive balance (Peeters & Szymanski, 2012). UEFA's Executive Committee unanimously approved the Financial Fair Play concept for the game's well being in September 2009. The clubs did not really have a voice about the introduction of Financial Fair Play.