Rivalry in the football industry and its impact on the stock prices of listed football clubs Master Thesis Finance BY W.J.Tankink Supervisor: J.H. von Eije Groningen, January 11, 2018 University of Groningen Faculty of Economics and Business MSc Finance Words: 9381 Abstract Rivalry in the football industry is examined in this paper as it analyses rivalry effects on stock price performance of football clubs. It does not matter which sport is exercised and at what level, rivalry among clubs is one of the main sources of attractiveness of a league. The rivalry among football clubs leads to a positive “mood” in case the rival loses and leads to a negative “mood” in case the rival has a for them positive match result. It is hypothesised that these emotions due to the performance of the period rival affect the stock price performance of the focal football club. This study shows that there is evidence that the results of the period rival can have an impact on the investment decisions of club supporters. Keywords: Rivalry, Period Rivalry, Football clubs, European Football, Stock performance 2 1. Introduction Football, or what they call it in the United States soccer, is a well-known sport exercised all around the world. It all started in 1887. From then on it was allowed by the Fédération Internationale de Football Association (FIFA) to recruit football players as an individual football club. This was the start of, what is familiar to us now as, professional football. In other words, money made its entrance here and the role of money has increased a lot since then (Dobson and Goddard, 1998). One of the largest causes for this significant role of money is the Bosman arrest, also known as the Bosman Ruling. Simply stated, after the expiration of a European football players contract, the player is free to move from his previous club to another club within the European Union. As a consequence of different regulations within national competitions, in combination with the large differences in budgets, Kesenne (2007) states that the gap between the “rich” and “poor” countries has clearly widened, budget-wise as well as performance-wise. In the world of football, four nations are considered to be the “Big four”, in terms of money. These countries are: England, Germany, Italy, and Spain. Other causes for the increasing role of money are the enormous increases in media contracts and sponsoring contracts, which is one of the main sources of income in the football industry. The other sources are merchandising income and income from match receipts (Scholtens and Peenstra, 2009). One clear example for such enormous media contracts is the Skysports contract for the English Premier League. Skysports has the right to broadcast the English Premier League matches for which it paid 7 billion euros, for a period of 3 years (2016 till 2019). As a consequence of these media contracts and sponsoring contracts, the football industry attracted relatively recently also the interest of large investors (Demir and Rigoni, 2017), by which the football industry eventually resulted in a stand-alone sector (Ecer and Boyukaslan, 2014). Eventually, this increase in interest in the football industry, led to football clubs going to the stock exchange. Mitchell and Stewart (2007) mention the enormous competition within the football sector as another reason for individual football clubs to move to the stock exchange. As it was the English Premier League that had the prime to be the first football competition considered to be professional, it was also an British football team that was the first that had a listing on a stock exchange. London based Tottenham Hotspur was the first, in 1983, to get a listing on the London Stock Exchange. Multiple other football clubs followed Tottenham Hotspur and became listed in the following years (Dobson and Goddard, 2001). Due to the uniqueness of the football industry, it is valuable and interesting for investors and share traders 3 to understand what the drivers are behind the fluctuations in share prices for listed football clubs. Several studies have examined how stock prices are affected by the results and performance of football clubs (Demir & Danis, 2011; Scholtens & Peenstra, 2009; Stadtmann, 2006). These studies purely examine what the effect of the match outcome is on the stock prices of that particular football club. Other studies find that stirred up emotions due to football have also an impact on the stock prices of football clubs (Demir and Rigoni, 2017; Edmans, Garcia, and Nørli, 2007; Palomino et al., 2009). Based on the findings in the literature, there are two ways a match outcome affects the stock price of a particular team. The match outcome itself and the mood of the fans resulting from the match outcome. Palomino et al. (2009) is one of the few studies that took both of these effects into consideration. They, however, only examined the effects in isolation of each other. Only one recent study took the two match outcome effects out their isolation and examined their combined effect on the stock price of a particular football club (Demir and Rigoni, 2017). This combined effect is examined by studying the effect of rivalry in the football industry on the stock price of a listed football club. This rivalry is represented by a focal team and its rival. The listed football club for which the presence of rivalry in its stock price is measured, is called the focal team. The combined effect of the performance of the focal team as well as the effect of its rival’s performance represents this rivalry effect. The rival team is the football club which is most feared by the focal team. In this study this combined effect on the stock price of a particular football club is examined here as well. This combined effect is called “Schadenfreude” by Demir and Rigoni (2017). This “Schadenfreude” effect in football can be observed in economic terms. Because all European competitions consist of playing rounds, all teams have one opponent every round. Therefore, all matches and performances can be observed by all investors. In that case, the share price of a team could be the result of both the performance of the team as well as that of the rival team. However, every football club in a particular national competition is somehow a rival of each other. The question is, which one is the most important one for the stock price performance of listed football clubs. Therefore, this study firstly defines a rival based on historical performance. This results in the first contribution to the literature and football industry. Each competitor of the focal team in its national competition is given a rivalry score. The competitor who scores the highest rivalry score is considered to be the rival. No other study defines a rival like this. Demir and Rigoni (2017) consider AS Roma and Lazio Roma to be rivals on basis of politics, for example. The Bosman Ruling causes the composition of football 4 club teams to differ (a lot) from year to year. Therefore is the rivalry score based on only two years of performance, causing the examined rivals to be “period rivals”. Secondly, the study that examined the rivalry effect on stock prices in the football industry (Demir and Rigoni, 2017) focuses on the rivalry between AS Roma and Lazio Roma. Here the focus is on multiple European rivalries. All football clubs have their centuries old “rival”, based on multiple and varied reasons. Some rivalries are based on their final position in the league. For example, both battling for the championship trophy, year in year out. Others are based on political reasons, or from both coming from the same city, or because of religious reasons. Many reasons thus exist for supporters of “their” team to consider a particular other team to be their arch-rival. The question arises, however, if the right football club is considered to be the arch-rival in terms of stock price affection. As a consequence, I will try to answer the following research question: Is period rivalry in the football industry present in the stock prices of listed football clubs? The following section will discuss the literature that can be related to this study and it presents hypotheses. In the subsequent section, “Data collection”, the required data to answer this research question are described and it is explained how and where these data are collected. Then, “Methodology” section describes how I test the hypotheses. In the “Results” section, the results following from the hypothesis testing are provided and analysed. Finally, in the “Conclusion” section, the research is concluded, limitations and suggestions for future research are given. 2. Literature Review Stadtmann (2006) studied how and if subsequent changes in Borussia Dortmund’s stock price could be explained by new information resulting from sportive success. He concludes that investors react to match results resulting in a negative effect on the share price in case the considered team loses and resulting in a positive effect on the share price in case the considered team wins. Panagiotis (2011) finds that the profitability of football clubs in the Greek Football League is positively related to football clubs’ sportive performance. Besides, Samagaio, Couto, and Caiado (2009) find a strong correlation between financial and sporting factor scores. Subsequently, Scholtens and Peenstra (2009) find a significantly positive(negative) stock market response to a victory(defeat). Also Demir and Danis (2011) find that abnormal returns 5 of listed Turkish football clubs are affected by their match results. These studies however purely examine what the effect of the match outcome will be on the stock prices of that particular football club.