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The University of Southampton
Academic Year 2014/2015
Faculty of Business and Law
Southampton Business School
M.Sc. Dissertation
UEFA’s Financial Fair Play Regulation: Financial Performance of English
Premier League Clubs
Student ID Number: 26907992
ERGO Reference Number: 14881
Presented for MSc. Accounting and Finance
This project is entirely the work of student registration number 26907992. Where material is
obtained from published and unpublished works, this has been fully acknowledged by citation
in the main text and inclusion in the list of references.
Word Count: 14,452 words
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ABSTRACT
European football clubs have witnessed enormous financial growth over the
past twenty five years; paradoxically, they have also experienced financial
distress within the same period. Record breaking revenue has been
accompanied by losses, high debt levels and the inability of clubs to settle
their financial obligations. This puzzling trend necessitated inquires by UEFA,
the governing body of European football, and the subsequent introduction of
Financial Fair Play (FFP) in 2010. As finance is not just about numbers but the
stories they tell, the introduction of FFP put the spotlight on club finances and
subsequently, worrying financial conduct was revealed. However, FFP was
introduced to curb these excessive conducts and thus improve the financial
performance of the club. As such, this thesis empirically examines the
performance of eight English Premier League clubs subsequent to the
introduction of FFP. In achieving this, four hypotheses, which are drawn from
the requirements of FFP, are quantitatively tested. The requirements are;
break-even, payables, negative equity and wage-as-a-percentage-of-revenue.
The findings imply that cumulatively, negative equity and wage-as-a-
percentage of revenue have been improved and maintained respectively
following the introduction of FFP. On the other hand, the findings reveal that
break-even and payables have deteriorated. Furthermore, the findings
suggest that wage expenses are going to play a big role if FFP is to achieve
further improvements. In addition, the findings show that individual clubs’
finances did not react in a uniform way.
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ACKNOWLEDGEMENTS
Firstly, I would like to acknowledge Jehovah Rohi for his directions throughout
the process of writing this dissertation. I also want to thank my Mr and Mrs
Alabi, Olanrewaju Alabi, Oladipo Alabi and Demola Oladipo for their kind
words which spurred me on during this project. Furthermore, I want to
acknowledge my good friends Ife Adeite, Tobi Ogunnubi and Femi
Oluwajemilusi who kept on asking about the progress of my work. Also, I
acknowledge and thank Ed Thompson and the whole Deloitte Sports
Business Group whose works on financial fair play and Football finance were
the inspiration for this thesis. Finally, I thank Dr Philippe Lassou, my
supervisor, who constantly drove me to improve not just this project but also
accounting knowledge as a whole.
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TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background……………….………………………………………………………...........1
1.2 Research Purpose…………..……..………………………………………………...….3
1.3 Research Question ……………….…………………………………..………………...3
1.4 Significance of the Study...……………………………………………..........…………3
1.5 Structure of Dissertation ..………………………………………………..……………..4
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction..………………………….………………………………….……………….5
2.2 History of Football…...…………………………………………………………..……….5
2.3 Governance in Football…...………………………………..……………………………6
2.4 Finance in Football…..……………………….………………………………………….7
2.5 Calls for Regulation of Football Finance..………...…………………………………..9
2.5.1 Financial Losses in European Football….….………………..……………9
2.5.2 Financial Doping…....……..………………………………………………..11
2.5.3 Indebtedness in European Football……………………..………………..12
2.6 Financial Fair Play: What Does it Entail?......……..…………………………………13
2.7 UEFA Prescribed Sanctions for FFP Regulation Breach…..………………………16
2.8 Is financial fair play fair?......………………………..…………………………………17
2.9 Previous works on the Impact of FFP on Financial Performance..……………….18
2.10 Summary of Literature Review…...……………………….…………………………19
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction…...…………………………………………………………………………21
3.2 Research Paradigm…...……………...………………………………………………..21
3.3 Research Methodology…..…………….……………………………………………...22
3.4 Sample and Data Description…..…………………...………………………………..23
3.5 Data Sources…...……………………….………………………………………………26
3.6 Hypothesis Development………………………………………………………………26
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3.6.1 Profitability…………………………………………………………………26
3.6.2 Indebtedness….…………………………………………………………….27
3.6.3 Negative Equity……….…………………...………………………………..27
3.6.4 Wage-benefits-expense-as-a-percentage-of-revenue………………….28
3.7 Definition and Measurement of Variables………………….………………………..28
3.8 Data Analysis.......……...……………………………………………………………….29
CHAPTER FOUR: RESULTS AND ANALYSIS
4.1 Introduction….…………………………………………………………………………..30
4.2 Hypothesis Testing….……….…………………………………………………………30
4.2.1 Hypothesis 1…….….…………...…………………………………………..31
4.2.1.1 Analysis of Individual Profitability of Clubs.……………………………33
4.2.2 Hypothesis 2….…….…...…………………………………………………..41
4.2.3 Hypothesis 3….…….…..………….………………………………………..47
4.2.4 Hypothesis 4……….………………………………………………………..51
CHAPTER FIVE: DISCUSSION
5.1 Introduction…………..……………………………………...…………………………..55
5.2.1 Hypothesis One………………..……………………………………………55
5.2.2 Hypothesis Two….….……..……………………………………………….56
5.2.3 Hypothesis Three……..…………………………………………………….57
5.2.4 Hypothesis Four….….……….……………………………………………..58
CHAPTER SIX: CONCLUSION
6.1 Introduction….….…………………………………………...…………………………..59
6.2 Conclusions….….………………………………………………...…………………….59
6.3 Research Limitations and Opportunities for Further Study………………………...61
REFERENCES……………..…………………………………………………………………………63
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LIST OF TABLES AND FIGURES
Table 2.1 Components of Relevant Income and Relevant Expenses…….…………………....15
Table 3.1 Final League table for the 2013/2014 season…..……………………...………..……24
Table 3.2 Clubs’ Participation in UEFA Competition between 2005 and 2014...............…….25
Table 3.3 Definition of dependent variables’ performance and measurement…..….…….…..29
Table 4.1: Profit or (Loss) figures for pre-FFP and post-FFP periods…….……..…….…..…......31
Table 4.2: Indebtedness of surveyed EPL clubs ……….…..………………………….....…......42
Table 4.3: Cumulative equity position of the surveyed EPL clubs……………………….……..48
Table 4.4: Cumulative employee benefits ………………………………………………………...52
Figure 4.1: Relevant income and expenses for the surveyed EPL clubs..…………….……...32
Figure 4.2: Arsenal FC’s profit/(loss) for the year ………………………………………..……...33
Figure 4.3: Arsenal’s relevant income and expenses …………………………………………...34
Figure 4.4: Chelsea FC’s profit/(loss) for the year……………………………………................34
Figure 4.5: Chelsea FC’s relevant income and expenses...…………………………………….35
Figure 4.6: Everton FC’s profit/ (loss) for the year …………………………………….………...35
Figure 4.7: Everton FC’s relevant income and expenses…..………………………………......36
Figure 4.8: Liverpool FC’s profit/ (loss) for the year ……………………………………………..36
Figure 4.9: Liverpool FC’s relevant income and expenses ……………………………………..37
Figure 4.10: Manchester City FC’s profit/ (loss) for the year …………………………………...37
Figure 4.11: Manchester City FC’s relevant income and expenses …………………………...38
Figure 4.12: Manchester United FC’s profit/ (or) (loss) for the year …………………………...38
Figure 4.13: Manchester United FC’s relevant income and expenses ………………………..39
Figure 4.14: Newcastle FC’s profit/ (or) (loss) for the year ……………………………………..39
Figure 4.15: Newcastle FC’s Relevant income and expenses………………………...............40
Figure 4.16: Tottenham FC’s profit/ (or) (loss) for the year…..…………………………………40
Figure 4.17: Tottenham FC’s relevant income and expenses ……………………………........41
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Figure 4.18: Arsenal FC’s total debts......……………………...………………………………….43
Figure 4.19: Chelsea FC’s total debts………..………………...…………………………………43
Figure 4.20: Everton FC’s total debts…..……………………...………………………………….44
Figure 4.21: Liverpool FC’s total debts…..………………………………………………………..44
Figure 4.22: Manchester City FC’s total debts…..….……………………………………………45
Figure 4.23: Manchester United FC’s total debts…...…………………………………………...46
Figure 4.24: Newcastle FC’s total debts…...….…………………………………………………..46
Figure 4.25: Tottenham FC’s total debts…………...……………………………………………..49
Figure 4.26: Everton FC’s Net assets/ (Liabilities) position .....….……………………………..50
Figure 4.27: Liverpool FC’s Net assets/ (liabilities) position…....……………………………….50
Figure 4.28: Newcastle FC’s Net assets/ (liabilities) position..….…………….………………..53
Figure 4.29: Surveyed EPL clubs’ Employee benefits and Revenue......….……....................54
Figure 4.30: Chelsea FC’s revenue and employee benefits.......……………….……………...55
Figure 4.31: Manchester City FC’s revenue and employee benefits…..………………………55
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF STUDY
Football is arguably the most followed sport not just in Europe, its historical
home, but in all continents of the world. However, European football is where
the sport has recorded its most impressive followership and financial growth
(Peeters & Szymanski, 2014). The late 1980’s saw a surge in television
broadcast earnings in European football. The surge was aided by
advancement in technology which enabled live broadcast of games to all parts
of the world. Furthermore, the higher demand from supporters also meant that
gate receipts soared. As such, the combination of broadcast earnings, gate
receipts and competition rewards ushered in skyrocketing revenue figures in
European football in the past 20 years.
Thus, it is contrasting that within the same period of huge revenue growth,
massive losses were also recorded. These losses have had a domino effect
on other aspects of the clubs’ financial performance. There has been increase
in debt resulting from clubs’ borrowing in order to ensure they have sufficient
cash-flow (financial doping); and also depletion of equity as a consequence of
the combination of losses and debts. All these trends culminated into clubs
going bankrupt or going into administration; that is, a process of forced
financial restructuring in a bid to prevent insolvency (Lago, Simmons &
Szymanski, 2006). In response to these financial trends, Union of European
Football Associations (hereafter, UEFA) the organisation presiding over
European football announced the introduction of the financial fair play
regulation (hereafter, FFP) which is aimed at restoring sanctity in European
football finance.”
The introduction of FFP was received with mixed reactions from football
stakeholders; however there was a mutual agreement that something had to
be done to protect the sport. The new regulation introduced to improve the
financial performance of football clubs in Europe. In achieving this, four
indicators or requirements have been introduced. They are:
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1) Break-even indicator,
2) Negative equity indicator,
3) Going concern indicator, and
4) Payables indicator.
Along with these indicators, UEFA also introduced sanctions which are meted
out to clubs for breaching the indicators. The sanctions range warnings to
exclusion from UEFA competitions.
There have been various studies which have highlighted the need for the
regulation of football finance and the potential effects of FFP. For example,
Morrow (2006) observed that Scottish clubs were increasingly over-spending
and heaping up debts; this, he believes is responsible for the increase in
number of clubs which report losses. Furthermore, he cited increased wage
expenses as the reason for over-spending. Bosca, Liern, Martinez & Sala’s
(2008) study of Spanish football clubs reveal the need for regulation as the
two top teams in the league had debts over €1 billion which was almost more
than the revenue of ten clubs in the same league. Muller, Lammert &
Hovemann (2012) revealed that an increasing number of clubs in Europe
reported a negative equity position (where liabilities exceed assets). These
studies highlight the need for finance regulation in European football. As
regards the potential effects of FFP on financial performance, Peeters &
Szymanski (2014) commented on its introduction by referring to it as a
potentially powerful medium of salvaging football clubs. They believe that
measures such as the break-even requirement (BER), restriction on wages
and debts would help to achieve this. However, the introduction of FFP has
also received its own fair share of criticism. Budzinski (2014) believes that
FFP could be counter-productive. He asserts that the cap on investments and
wages along with sanctions for breach of the regulation could be restrictive as
it might stunt growth and competition in European football.
This thesis focuses on the English Premier League (EPL) for various reasons.
Firstly, the EPL has recorded the highest amount of revenue amongst all the
European leagues. In 2010, the EPL generated about €2.5billion in revenue.
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This figure exceeded that of second place German league by over €800
million (Deloitte, 2011). The EPL also recorded the highest losses in Europe
in the same year. Furthermore Schubert & Konecke (2015) reported that the
EPL has the highest debts levels and also accounts for the highest amount of
financial doping in the world. These statistics makes the EPL a fertile ground
for assessing whether the FFP is achieving its aims or otherwise.
1.2 RESEARCH PURPOSE
This study’s primary purpose is to empirically examine whether there has
been an improvement in the financial performance of EPL clubs since the
introduction of FFP. As mentioned above, the EPL could be seen as a hot bed
for poor financial performance in European football. The FFP has been
introduced amongst other things, to improve the profitability, indebtedness
level, and equity positions of football clubs. Therefore, this research aims to
investigate whether EPL clubs have had their financial performance improved
in relation to these indicators. As FFP has been in operation for five years, this
thesis carries out its investigation for the five years and compares its results
with five years prior to the introduction of FFP.
1.3 RESEARCH QUESTION
Thus, the research question for this study is:
Has there been improvement in the financial performance of EPL clubs since
the introduction of FFP?
1.4 SIGNIFICANCE OF THE STUDY
As a result of the amount of money generated by Football in Europe, it is no
longer just a sport but a business. More precisely, in England, football has
become arguably the most vibrant and viable export which has profound
influence on other sectors. The House of Lords (2013) described the industry
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as being an “economic agent” that has improved employment, and the Gross
Domestic Product of England. The significance of the industry was further
highlighted by Lord Burns who asserted that “in many ways the need for
reform is a reflection of success, not failure” (Culture, Media and Sport
Committee, 2013).
Conversely, the paradox of high revenues being accompanied by losses has
posed a theoretical question for academics and researchers. Also, the
continued existence of football clubs despite poor financial performance has
bewildered researchers. Storm & Nielsen (2012) stated that it is a wonder that
clubs survive despite “operating on the brink of insolvency”. Finally, amidst
calls for regulation, many observers are unsure whether regulation would be
able to remedy the financial situation of clubs. Hence, this empirical research
is carried out with view finding potential insights which could provide answers
to the questions surrounding financial performance of clubs, specifically EPL
clubs
1.5 STRUCTURE OF DISSERTATION
This study is divided into six chapters. The first chapter, introduction, provides
a background to the research, gives a brief purpose for the research and
specifies the research question. Thereafter, chapter two focuses on the
existing literature around football, its history and governance, football finance,
financial trends in European football, the introduction of FFP and what it is
about, as well as existing studies about financial performance of football
clubs. Chapter three presents the methodology that this thesis adopts in
carrying out the research; it also details samples chosen and the sources and
description of data collected and how the data is analyzed. Chapters four and
five present the empirical results of the analysis which consists of trend
analysis; they also discuss and relate the results to the literature. Finally,
chapter six summarizes the thesis and discusses limitations that the study
encountered and also provides potential pathways for further research.
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CHAPTER TWO
LITERATURE REVIEW
2.1 INTRODUCTION
The aim of this chapter is to gain some insight into the financial performance
of football clubs. In achieving this, the chapter begins by giving a historical
development of football, governance in football and the inflow of finances into
football. The next part examines the calls for regulation of finances in football
and the introduction of FFP. The chapter concludes by reviewing previous
empirical studies into the financial performance of European clubs.
2.2 HISTORY OF FOOTBALL
Etched on the tunnel walls leading to Saint Mary’s Stadium, in Southampton,
are the words “In 1894 Charles Miller took a football to Brazil…the rest is
history”. The quote alludes to the historical development and origin of football
stemming from England and spreading to other countries of the world. This
section gives an insight into the history of football and how it has developed
into the present day game.
Football as we know it today takes its root from leisure sporting events that
took place at schools in the United Kingdom in the 19th Century. What started
out as just a way of exercising and enjoying school breaks, caught the eye of
school administrators who viewed the leisure activity as a way of fostering
teamwork and cooperation amongst pupils (FIFA, 2015a). With the spread of
the game among schools across the region and with the emergence of the
likelihood of competitions between the schools, calls for uniform rules of the
sporting event became expedient (Harvey, 2013). The need for regulation led
to formation of the National Football Association in England in 1863. The
establishment of the first regulatory body of football in England is what has led
scholars and historians to regard England as the birth place of football
(Dejonghe, 2007). Furthermore, the spread of the game across the world
coincided with the influence that England was having in various nations; along
with the spread of English culture came the spread of what is referred to as
the beautiful game.
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In conclusion, the quote that was used to begin this section was made by
Charles Miller, a Brazilian national schooling in England around the period of
the development of football. He then moved back to Brazil with a football and
this heralded the global spread of the game and as the quote says, “the rest is
History”.
2.3 GOVERNANCE IN FOOTBALL
As earlier stated, the first form of governance in football emerged in 1863
which birthed the first set of regulations by which the game was to be played.
However, the budding growth and spread of football as a result of the staging
of both international and club football in England led to the creation of other
Football Associations (FA) across Europe. The creation of these new FA’s
also brought about different sets of rules which each FA administered in its
own country. The unification of the different rules took place in 1886 after
which the International Football Association Board (IFAB) was formed. This
body is still responsible for making and updating the rules for the game (FIFA,
2015b).
Subsequent to the formation of IFAB, the idea of having an “umbrella
organisation” which would oversee world football governance was floated in
1904 by seven European FA’s (French, Belgian, Danish, Dutch, Spanish,
Swedish and Swiss FA’s). Thus, on the 21st of May 1904, the world football
governing body, Federation Internationale de Football Association (FIFA) was
founded in Paris (Sugden & Tomlinson, 1998).
This study is based on FFP which was introduced to improve financial
performance in European clubs’ football; hence it would be necessary to look
at the development of governance in European football. The following
paragraph addresses the origin and formation of the governing body of
European football.
UEFA, a member of FIFA, was established in Basel, Switzerland in 1954 as a
result of the need to decentralize football governance amidst the game’s
exponential growth. Upon establishment, UEFA headed by its first President-
Ebbe Schwartz of Denmark-embarked on administering and directing football
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activities within the European region. In 1955 and 1958 respectively, UEFA
hosted its maiden club and national team competitions and these were seen
as significant events during the formative period of the organisation. The
organisation has since grown to be in charge of various football events at all
levels (international, club and youth), having different committees which deal
with varying matters and has under the leadership of its current President,
Michel Platini looked to protect the image and long term viability of European
football (UEFA, 2014a).
2.4 FINANCE IN FOOTBALL
From the humble beginnings of a leisure activity on the green grasses of
English high schools, football has metamorphosed into a global industry that
is so affectionately patronized by millions around the globe. This had led to
enormous influx of money into the game. The emergence of satellite television
for those who are unable to travel to the venue of any sporting event has
played an important role. Stefan Szymanski (2007) described the influence of
television on the growth of finance in football as “the single most important
contributor” to the financial boom which has occurred in the industry.
Furthermore, Stephen Morrow (2004) identified the following factors as the
reason for the enormous inflow of money into the football industry:
1) Revenue from broadcast rights,
2) Income from advertising and sponsorship; and
3) Revenue generated from the sale of tickets for football matches.
Through the traditional sources of finance (income) as mentioned above, the
European region has experienced substantial increase in the amount of
money generated over the years. UEFA, in the year 2014 reported
€1.25billion as the combined revenue for clubs participating in its club
competitions; which represents a 108% increase in revenue in eleven years
with the revenue figures covering only clubs that participate in UEFA
competitions. Also, in 2013 UEFA’s Benchmark Report reported total revenue
figures of €14.1 billion from Europe’s top division clubs representing an €800
million increase from the previous year. The phenomenal increase coincided
with the period where the Euro-zone experienced slow recovery from the
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2008 financial crisis. In the year 2011, the European football industry recorded
an annual average growth rate of 5.6% over the preceding five years while as
a whole the Euro zone recorded a growth of 0.5% within the same period
(Franck, 2014). Dan Jones of Deloitte consultants asserted that “European
football’s continued revenue growth demonstrates an impressive resilience to
the extremely challenging economic times – underlying the continued loyalty
of its fans and the continued attractiveness of football to sponsors and
broadcasters” (Kennedy & Kennedy, 2012). This emphasizes the enigmatic
rise in football revenue as a result of popular demand.
In England, the increase in the amount of money generated from football is
similar to that of the European region at large. Football is seen as one of the
country’s biggest exports and in 2012, a survey by VisitBritain revealed that a
total of £706million was spent by tourist on watching football matches. Also in
the same year, clubs in England remitted a total of £1.3billion as tax to the UK
government (House of Lords, 2013). However, according to the House of
Lords (2013) report the financial boom in England did not start until 1992.
Prior to this date, there were restrictions placed on clubs; these restrictions
were not just on football matters, but also included the commercial conduct of
the clubs. However in July 1992, the top clubs in England in partnership with
the English FA formed the English Premier League which gave the clubs
more freedom in how they conducted their commercial business and also set
out a definite proportion of allocation of both domestic and foreign income
received from sponsorships. The removal of restriction and the independence
given to clubs in conducting their activities opened the flood gates for huge
revenues. According to a report by Bill Wilson (2015), a total of £3.2billion was
generated as revenue by the twenty EPL clubs in 2014 representing a 29%
year on increase. Furthermore, the recently announced EPL broadcast rights
which were acquired by both British Telecoms and Sky is a record
£5.136billion; representing a 70% increase from the previous figures (Deloitte,
2015).
In conclusion, it is clear to see that football has come a long way in terms of
presence of money within the industry. Moreover, with the global love and
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demand for the game, coupled with matching technological advancements to
meet such demands, it is not much of a surprise that the amount of money in
football has reached such heights. The inflow of money into football has
however raised the eye brows of some people. For example, members of
parliament in the England once referred to football as the “worst governed
sport” (The Culture, Media and Sport Committee, 2013). Why would stringent
financial regulation be needed in a sport that is self-thriving? The following
section explores why these concerns exist.
2.5 CALLS FOR REGULATION OF FOOTBALL FINANCE
“They think the goose is going to keep on laying the golden eggs; that it will
never stop. Well, I don’t buy into that. It could so easily all go very wrong. I
don’t think that football has fully digested or understood many of the big
money changes that have been going on recently” These were the words of a
worried former Minister for Sports in the UK, Tony Banks about the financial
situation of football as far back as 1998. His fears were that the financial
boom was not going to last forever and that the recklessness of clubs that
accompanied it would lead to a catastrophe (Dempsey & Reilly, 1998). Could
this just have been a case of paranoia or was there substance to the claims
that the game of football was walking a thin rope and would soon tip over?
This section explores the reasons why regulators, academics, finance
personnel and other stakeholders deemed it fit to ask for something to be
done to prevent a downward spiral of football finances.
2.5.1 FINANCIAL LOSSES IN EUROPEAN FOOTBALL
It is difficult to understand that during a period when European football
recorded a 1000% and 700% rise in broadcast and ticket price revenue
respectively between 1992 and 2013, anyone would suggest the existence of
a problem with the financial health of football clubs given that the major
sources of income are experiencing such phenomenal growth (Fitzpatrick,
2014). However, UEFA and academics have raised alarms concerning an
impending financial crisis. In 2009, UEFA reported a record €12.8billion of
total club income for the year which represented a 6% increase on the
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previous year but also reported a record €1.6billion of net losses for the same
period (UEFA, 2011). The bewildering and largely contrasting figures reported
appear confusing. However, Kennedy & Kennedy (2012) referred to the
hitherto focus on the impressive growth figures of revenue as “akin to
complementing a man in intensive care for having a full head of hair”. They
also suggest that a further scrutiny of European football would reveal what
could be termed as an “alternate reality” fuelled by losses as a result of
financial recklessness.
As such, UEFA reported that 372 clubs, 56% of clubs within European
football, recorded losses to the tune of €2.036billion in 2010 while 195 of the
clubs had losses that were higher than revenues by 20%; meaning that for
every €100 generated as revenue by those clubs, €120 was spent by them in
the same period (Muller et al., 2012). It is therefore not out of place to wonder
why clubs spend more than they earn. Muller et al, (2012) in their study
identified the increase in employee benefits expense (wages and transfer
fees) as the main reason why clubs made significant losses. They cited
the14% growth between 2005 and 2010 in wages to be the cause of the over
€2billion cumulative losses recorded by 665 clubs in Europe for 2010. Also,
Franck & Lang’s (2014) study revealed that 78 clubs in Europe as at 2006
spend above 100% of revenue on employee benefits solely. Schubert &
Konecke (2015) cite that the “rat race” phenomenon, where clubs need to
spend in order to be successful, as the chief cause of rising employee
benefits. Drut & Raballand (2012) also stated that the motive of clubs provides
an explanation for their persistent financial recklessness; they believe that
since the objective of owners of football clubs is not to make profit but rather
to “maximize utility” (prestige of winning trophies and honors) they are not as
averse to losses as other conventional business owners. Vopel (2011) asserts
that the rat race phenomenon along with the nature of sporting activities in
which “the winner takes all” has added to the desperation. The case of Leeds
United, one of the top clubs in European football in the early 2000’s illustrates
the motive of clubs. Despite the losses made by the club, they continued to
spend with an intention of maintaining their status and with the hope of
making profits that would cover these losses. This was not the case as the
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club went into administration in 2007 as a result of insolvency (Kennedy &
Kennedy, 2012). Additionally, in his study of the Scottish top division, Morrow
(2006) claimed that a “disregard for financial common sense” by club owners
led to monumental increase in players’ wages. The terms of the contracts
according to him could neither be sustained in the medium or long term. And
this was evidenced by the fact that for four years, only one club in the Scottish
top division recorded profits.
The above gives an insight into why despite constant increase in revenue,
losses are still being recorded by clubs. However, a study by A.T. Kearney
(2010) titled is European Football Too Popular to Fail? Pointed out that
conventional businesses would find it difficult to perpetually make losses and
still be in existence; hence the surprise as to how football clubs were still in
business. But as the title of their study goes, maybe European football is too
popular to fail. But the question is, how are the clubs were able to continue
operating?
2.5.2 FINANCIAL DOPING
With the rising level of losses and the need to spend more in order to earn
more, a phenomenon known as financial doping emerged. Financial doping is
simply the practice of using money or its equivalent that is not generated via
football related activities from external parties. The study by Muller et al.,
(2012) extensively dwelt on financial doping. They assert that because clubs
are making excessive losses, they rely on rich owner’s (sugar daddies) or
other creditors’ funds to balance their books. The funding is done mainly
through direct cash injection and other non-football related donations.
However, they stated that though this practice seems an unfair advantage for
clubs that have access to these funds, it was not in breach of any laws.
Furthermore, they believe that the thriving of any competition must be hinged
on a level playing ground for all competitors and as such, financial doping
poses a threat as not all clubs have access to these funds.
The question marks surrounding financial doping has not stopped clubs from
engaging in it. Kennedy & Kennedy (2012) found that Real Madrid FC and
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Barcelona FC, arguably the largest football entities had a combined debt of
€1billion in 2010 which was mainly owed to Spanish banks. The study by
Schubert & Konecke (2015) listed various cases of clubs that had engaged in
financial doping; they cited clubs like Paris Saint Germain in France, Anzhi
Makhachkala in Russia, AC Milan in Italy and Liverpool, Manchester United,
Manchester City and Chelsea in England. As a result of the enormity of
financial doping taking place, they refer to England as a “melting pot”. They
highlighted the obvious case of Chelsea that has been receiving financial
support from its Billionaire owner Roman Abramovich since 2003 and which
as at 2015 had exceeded a billion Euros.
The above is a clear indication of the amount of money which has come into
football from external sources. Also, it answers the question of how despite
making heavy losses, football clubs still survive. Once again A.T. Kearney’s
(2010) study states that conventional businesses will face the problem of
creditors requesting payment of the loans or funds given. Their assertion was
further buttressed by Simon Kuper who believes that lenders are averse to
“pulling the plug” on the loans because of the strength of the clubs’ brand. He
went on further to say that due to this, clubs are somewhat “immortal” (Franck,
2014). Hence as financial doping answers the question posed for losses, it
leads to yet another question: is financial doping sustainable?
2.5.3 INDEBTEDNESS IN EUROPEAN FOOTBALL
As clubs in Europe continued to make losses and also engage in financial
doping, their level of indebtedness to creditors was also on the increase. In
furtherance to the question asked above if it is working and clubs are
remaining competitive, is there a need to worry? The financial figures reported
however imply that there is a need for worry. UEFA through its 2010
Benchmark report, highlighted that for the year 2010, clubs had €19.1billion
as liabilities (result of financial doping) whereas total assets stood at €21billion
representing a total Net Equity (total assets less total liabilities) of just over
€1.8billion. Although the €1.8billon seems to be a huge amount, in the context
it would not seem so. The figure means that out of the €21billion in assets, the
13
clubs actually only own €1.8billion, a mere 8.6%,as such the amount then
does not speak well of the financial position of the clubs.
Also, the increase in debt has led some clubs to report negative equity; a
situation where total liabilities exceed total assets. Muller et al, (2012) found
that 237 out of the 665 clubs in Europe’s top divisions had negative equity in
2010. A clearer picture is show by the fact that auditors expressed “going
concern” (because their assets are inadequate to meet obligations) doubts
over one in eight clubs in Europe. That is, auditors had doubts over the ability
of these clubs to continue to trade after one year. According to Franck (2014)
the negative equity situation worsened in 2011 as one in seven clubs had
auditors express doubt as regards their going concern and a staggering 38%
of clubs had their liabilities above assets.
Recalling Simon Kuper’s assertion that clubs are immortal because lenders
are unwilling to refuse giving them loans or take the case of non-repayment to
court, one could almost say that there is no issue to worry about. However,
Drut & Raballand (2012) in their study reveal that the case of Portsmouth was
the first of many to signify a huge problem. They report that the rising debts
and inability to meet financial obligations forced the club into administration.
This case coupled with others, led Michel Platini to refer to the surprising
financial situation as “clear warning signs” although some commentators have
argued that what football was experiencing was a full scale financial crisis.
The above sets the stage and gives an insight into why financial regulation in
European football has been clamored for. The losses that clubs in Europe
recorded the emergence of financial doping and the slide from positive equity
to negative equity of clubs made the cry for regulation even louder. Hence,
UEFA in a bid steer European football to stable waters introduced FFP.
2.6 FINANCIAL FAIR PLAY: WHAT DOES IT ENTAIL?
UEFA announced the introduction of FFP regulations in 2009 but it was fully
implemented in 2010. The introduction of FFP came as an additional measure
to UEFA’s existing Club Licensing System which was used to screen clubs
14
and ensure that clubs complied with minimum requirements as stipulated by
UEFA (Peeters and Szymanski (2014). Franck (2014) referred to FFP as the
birthing of stringent financial requirement which clubs in Europe had to adhere
to. FFP was seen as a welcomed development in the football world and there
was a consensual feeling that something had to be done about the finances of
European clubs. It is noteworthy that FFP need not be adhered to by all clubs
in Europe. Ed Thompson (2015), asserted that only clubs that qualify for
either Champions League or Europa League, UEFA’s two competitions, would
be mandated to adhere.
As indicated by UEFA, the following are the objectives the regulation sets out
to achieve:
1) To introduce more discipline and rationality in club football finances.
2) To reduce the pressure on salaries and transfer fees and limit
inflationary effect.
3) To encourage clubs to compete with(in) their revenues.
4) To encourage long-term investments in the youth sector and
infrastructure.
5) To protect the long-term viability of European club football.
6) To ensure clubs settle their liabilities on a timely basis
(Source: UEFA, 2014b).
In order to achieve these set out objectives, UEFA introduced four indicators
which it calls “sensible” and “achievable” measures (UEFA, 2014b). In light of
record breaking revenues accompanied by recurrent losses, UEFA introduced
the break-even requirement (BER) indicator which Franck (2014) referred to
as the “cornerstone of the new regulation”. According to him, the BER places
emphasis on “living within own means” that is, for a club to pass the break-
even test, they have to ensure that their “relevant expenses” do not exceed
their “relevant income” (see table 2.1 below) within the monitoring period of
three financial years meaning that a club can make a loss in one year but
cover this up with positive results in the other two financial periods. The
monitoring period is retrospective, that is for 2014, the monitoring period will
15
consist of 2011, 2012, and 2013. According to Geey (2011), UEFA recognized
that due to the bad state of clubs finances and the impracticability of it being
turned around overnight, they included an “acceptable deviation” clause as a
palliative. The acceptable deviation clause allows clubs to make losses of not
more than €45million and €30million for the first and second monitoring
periods as long as the owner makes investment for relevant revenue
generating activities to the tune of the amount of the deviation. However, if the
investment option is not taken up by the owners, clubs are only allowed to
deviate to the tune of €5million per monitoring period (Geey, 2011). The
acceptable deviation is only permitted for the transitioning period after which
by 2018/2019 season, clubs will be required to break-even fully.
Relevant Income Relevant Expenses
Ticket revenue
Sponsorship and advertising revenue
Commercial and broadcasting activity
revenue
Other operating income including
non-football related activities but that
are related to the club)
Costs of sales
Employee benefits (wages, salaries
and social security contributions)
Operating expenses including match-
day, administrative and overhead
expenses
Finance costs and dividends
Non-relevant income Non-relevant expenses
Transactions above fair value
Donations and assumptions of debt
Income from non-monetary credits
Expenditure below fair value
Expenses on youth development
Corporate social responsibility
Non-football related expenses
Source (Budzinski, 2014).
Table 2.1 Components of and Differences between Relevant Income and Relevant
Expenses
Besides ensuring that clubs make profits or at the very least break-even, the
break-even requirement is also designed to reduce financial doping. The
emphasis on not including donations as income limits how much a club can
16
be bailed out by rich owners. Peeters & Szymanski (2014) pointed out that it
is possible to record accounting profit (which could contain donations from
sugar daddies) and still fail the break-even requirement. The next indicator is
the going concern indicator. It captures the auditor’s personal view as regards
the ability of the club to exist in perpetuity (Muller et al, 2012). The next
indicator is negative equity. It requires that clubs have a positive net asset
value (that is assets being greater than liabilities). The final indicator is the
overdue payables. This indicator states that there should be no outstanding
payments owed to “other clubs, employees and social/tax authorities as at the
30th of June of the competition year” (UEFA, 2012). Peeters & Szymanski
(2014) believe that the payables indicator is geared at ensuring that clubs
have better solvency and are capable of fulfilling their obligations. In
furtherance to the indicators, UEFA advised clubs to limit their employee
benefits expenses to 70% and net debt to 100% of total revenue (UEFA,
2012).
UEFA is able to monitor the financial performance of the clubs through these
indicators by assessing the information of clubs’ financial statements which
must be submitted to UEFA when the club is applying to take part in any of
UEFA’s competitions. The introduction of these indicators is aimed at ensuring
that clubs improve their management of income and expenditure in a manner
that is sustainable (Morrow, 2014). The question is, how will the governing
body ensure that clubs adhere to them? Peeters and Szymanski (2014) in
their analysis of FFP asserted that the success of the regulation would hinge
on how credible and firm punitive measures for breach of FFP are. The next
section details the sanctions that have been introduced by UEFA.
2.7 UEFA PRESCRIBED SANCTIONS FOR FFP REGULATION BREACH
Along with the requirements and indicators, UEFA also introduced a number
of possible sanctions (disciplinary measures) to be meted out to clubs that fall
short or fail the FFP indicators. The sanction that a club violating any of the
FFP regulations would be liable to could be any of the following:
1) A warning,
2) A reprimand,
17
3) Fine,
4) Deduction of points,
5) Withholding of revenue from a UEFA competition
6) Prohibition on registering new players in UEFA competitions
7) Restriction on the number of players that a club may register for
participation in UEFA competitions, including a financial limit on the
overall aggregate cost of the employee benefits expenses of players
registered on the A-list for the purpose of UEFA club competitions,
8) Disqualification from competitions in progress and/or exclusion from
future competitions,
9) Withdrawals of a title or award (UEFA, 2014c).
2.8 IS FINANCIAL FAIR PLAY FAIR?
Questions have been raised over the equitability of FFP. Also, the introduction
of FFP has received criticism. Franck (2014) stated, it is not abnormal for new
regulatory controls such as FFP to encounter criticism because it is
impossible to satisfy the needs of everyone. This section highlights some of
the criticism and arguments against FFP.
The first criticism against FFP is that of “ossification”. To ossify basically
means to make something hard or difficult. Vopel (2011) believes that the
introduction of BER would lead to unrivalled dominance by clubs that are
already huge and successful. His thinking stems from the believe that in
sports “success breeds success” and since one of the most important ways
clubs achieve success in football is by further investment, a cap or restriction
to their buying power would lead to a situation where big clubs remaining big
while small clubs remain small. In addition, Madden (2014) and Franck (2014)
argue that the strict rule of allowing only football related income is the biggest
undoing of the BER. Franck (2014) asks why anyone should be bothered with
the source of the “additional money” and feels that this would have an
adverse effect on investments in football. Madden (2014) argues that the
restriction of external funds would lead to lower quality of players which would
have a negative effect on team performances.
18
Also, Geey (2011) cites a potential loophole because FFP’s provision which
states clubs will not be sanctioned even if they do not break-even, as long as
they can show evidence of “positive trends in the annual break-even results”.
Finally, the effectiveness and appropriateness of the disciplinary measures in-
line with the objectives of the regulation have been questioned. Allister Wilson
of ICAS Research Committee raised concerns over imposing financial
sanctions on clubs that are already going through financial troubles. His
argument is that the sanctions should take a non-financial form so as not to
worsen the clubs issues. He describes the financial sanctions as a case of the
clubs suffering “double jeopardy” (Morrow, 2014).
In conclusion, amidst all the criticism, UEFA has responded and denied these
fears. For example the case of ossification has been denied by UEFA. Gianni
Infantino of UEFA rubbished the talk of dominance by saying that “FFP is
about financial sustainability in Europe…in fact the application of break-even
principle will lead to a more competitive and sustainable football sector”
(UEFA, 2014d).
2.9 PREVIOUS WORKS ON THE IMPACT OF FINANCIAL FAIR PLAY ON
FINANCIAL PERFORMANCE
In Sports finance journals, there are abundant articles that talk about the
origin, nature, theoretical impacts, and the sanctions appropriated by FFP;
however, there are few empirical works that give an insight into the impact of
FFP on financial performance. As earlier stated, although the works done by
Vopel (2011), Sass (2012), Szymanski (2012), and Franck (2014) may be
valid as regards the potential effects of FFP such as widening of the gap
between clubs or loopholes in the regulation, the central essence of the
regulation has hardly been tested.
Some of the few empirical works centered on financial performance of football
clubs include the work by Ecer & Boyukaslan (2014). They analyzed the
19
financial performance of the “big four” clubs in turkey (Fenerbahce, Besiktas,
Galatasaray, and Trabzonspor) over a five year period. By making use of the
financial information of the clubs, their analysis ranked Fenerbahce as first;
followed by Trabzonspor, Besiktas and Galatasaray as last in order of the
clubs with the best liability positions. They pointed out that Besiktas had been
excluded from the 2012/2013 edition of any of UEFA’s competition as a result
of their inability to meet financial obligations as at when due. The profitability
analyses also reveal the same ranking sequence as that of the liabilities.
Overall, they conclude that Fenerbahce is the best placed club financially
while Galatasaray takes the last place. Although the work by Ecer &
Boyukaslan (2014) looks at the financial performance of clubs in the
European region, it is worthy of note that their analysis does not directly link to
FFP regulation.
In contrast, Peeters & Szymanski (2014) simulated the introduction of the
break-even requirement. Their analysis was in direct relation to the FFP
regulation. They collected data from four top leagues in Europe (English,
Spanish, Italian and French league). By simulating the various acceptable
deviation thresholds, they assert that the break-even requirement could be a
very important medium of reducing the inflationary effect on wages. Their
analysis also indicates that the introduction of FFP would considerably reduce
the wage to turnover ratio of clubs, especially clubs in England.
2.10 SUMMARY OF LITERATURE REVIEW
The literature review started out by giving a historical background of football
and how governance of the game at international and club level came about.
The chapter went further to present the impressive financial growth of football
which has been as a result of increased demand and advancement in
technology. Furthermore, the contrasting financial crisis which has
accompanied the financial growth was also identified. Through the studies by
Kennedy & Kennedy (2012) and Franck & Lang (2014), Muller et al (2012),
Franck (2014), and Drut & Raballand (2012), the chapter revealed increase in
20
relevant expenses, financial doping, and increase in employee benefits
expenses as being the major contributors to the financial crisis in European
football.
Also the chapter explained the measures and sanctions introduced by the
governing body to improve the financial situation. Finally, the chapter
concluded by presenting some previous empirical studies on the financial
performance of clubs in Europe.
21
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 INTRODUCTION
The research methodology adopted plays a decisive role in the general flow,
logic, and acceptability of the results of any given research. Therefore, this
chapter enumerates the various decisions and justification for the research
methodology used for this thesis. Firstly, the chapter starts off by setting up a
philosophical framework for the research as well as discussing the approach
and methods through which the research is carried out. Secondly, the next
section explains the rationale for the samples chosen as well as the data
chosen and their sources. Thirdly, the chapter presents the research
hypothesis along with the basis of their development and finally concludes
with definition and measurement of variables and also an insight into the data
analysis process.
3.2 RESEARCH PARADIGM
Collis & Hussey (2014) referred to research paradigm as a “philosophical
framework” which steers the procedures of scientific research. The process of
making a choice of paradigm for a research is hinged on different factors.
According to Saunders, Lewis & Thornhill (2007) the feasibility of an approach
to a given topic, research area or expected outcome is worth considering
when deciding what paradigm to choose. Also, as it is an individual
conducting the research, his/her view on the link between knowledge and the
procedure through which it arises is also very important. Some researchers
are more concerned with facts and figures while others are more concerned
with feelings and attitudes; and hence what might be important to one
researcher might be less important to another.
Generally, the two main paradigms that most frequently appear in social
science studies are positivism and interpretivism paradigms. Positivism is
anchored on the ideology that there is a distinct separation between the
researcher and the reality being studied. The end goal of positivism is to test
theories or hypotheses through empirical observations and experiments
22
(Collis & Hussey, 2014). This simply means that the researcher relies mainly
on empirical results (facts) when reaching conclusions because it can be
authenticated, verified or mathematically proved (Collis & Hussey, 2014). As
such, positivism is closely linked with deductive approach because of its
reliance on empirical results.
Interpretivism on the other hand is hinged on the belief that “reality is social
constructed” (Mertens, 2005). In other words, the individual plays an active
role in the research process; that is the researcher is not independent of the
research rather the researcher “interacts with that being researched” and
focuses on understanding the phenomenon (Collis & Hussey, 2014).
This thesis focuses on the measurement of financial performance of EPL
clubs after the introduction of FFP. As stated by Saunders et al (2007) the
positivism paradigm relies on an existent theory or phenomenon (in this case
FFP) for which data is collected and tested in order to prove a developed
hypothesis; while an interpretivism approach seeks to develop a theory rather
than measure one. Hence, the foundation of this thesis is that of positivism
paradigm. In addition, the thesis uses a deductive approach which According
to Collis & Hussey (2014) makes use of a theoretical framework, which
usually exists within the body of knowledge, and examines its validity through
the use of empirical observations. Furthermore, the data used in a deductive
approach is specific and is usually identified or alluded to by the theory within
the body of knowledge. Although there is no particular ascribed name given to
the theory, this project seeks to test the theory that the introduction of
Financial Fair Play has improved the financial performance EPL clubs. The
following paragraphs highlight how this research goes about testing the above
stated theory. Therefore explanations of how samples are selected, how data
is obtained, hypotheses development, definition and measurement of
variables used, as well as analysis techniques are detailed below.
3.3 RESEARCH METHODOLOGY
As the choice of paradigm has been concluded, the next step is to make a
decision on the research methodology. The choice of methodology is very
important as it serves as a medium through which philosophical assumptions
23
are expressed (Collis & Hussey, 2009). According to Bryman & Bell (2015),
quantitative methods place greater emphasis on measurement in the process
of gathering and analysing data and are frequently used along with positivism
because it “takes a view of social reality as an external and objective reality”.
Furthermore, quantitative methods seek to test theories through vigorous data
analysis and bases the conclusion on statistics obtained; whereas qualitative
method is aimed at generating theories. This has been highlighted as one of
the main reasons why quantitative methods are used in conjunction with
positivism.
As such, this thesis makes use of quantitative method, deductive approach
and positivism paradigm to test whether financial performance of EPL clubs
has improved after introduction of FFP.
3.4 SAMPLE AND DATA DESCRIPTION
This thesis focuses on clubs in the EPL for specific reasons. Firstly, according
to Drut & Raballand (2012) the highest amount of losses across Europe was
recorded in the EPL. Secondly, Schubert & Konecke (2015) found that
financial doping is most rampant in the EPL. Finally, according to Drut &
Raballand, the highest total liabilities were also recorded in the EPL in 2007.
The aforementioned makes the EPL a fertile ground for assessing the
progress made by FFP since its introduction.
The system operated in the EPL is that of a twenty team league; and the three
clubs who finish in the least positions are relegated to the lower division.
Furthermore, the top four finishers qualify to the Champions league while the
fifth and sixth qualify for the Europa League. However, UEFA can permit one
more club into its competition on bases such as good disciplinary records;
however this does not occur every year. See table 3.1 below for the final
league table for the 2013/2014 season.
24
EPL League Table 2013/2014
League
Position Club Points
1 Manchester City 86
2 Liverpool 84
3 Chelsea 82
4 Arsenal 79
5 Everton 72
6 Tottenham 69
7 Manchester United 64
8 Southampton 56
9 Stoke 50
10 Newcastle United 49
11 Crystal Palace 45
12 Swansea City 42
13 West Ham United 40
14 Sunderland 38
15 Aston Villa 38
16 Hull City 37
17
West Bromwich
Albion 36
18 Norwich City 33
19 Fulham 32
20 Cardiff City 30
Table 3.1 Final League table for the 2013/2014 season
Recalling Ed Thompson’s (2015) assertion that only clubs that take part in
UEFA competitions are required to abide by FFP regulations, a further
selection of clubs in the EPL had to be carried out.
25
Table 3.2 Clubs’ Participation in UEFA Competition between 2005 and
2014
Table 3.2 shows the amount of times the twenty clubs had participated in a
UEFA competition over the past ten years. Therefore based on the number of
Participation in UEFA Competition between 2005-2014
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 TOTAL
Manchester
City No No No Yes No Yes Yes Yes Yes Yes 6
Liverpool Yes Yes Yes Yes Yes Yes No Yes No Yes 8
Chelsea Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes 10
Arsenal Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes 10
Everton Yes No Yes Yes Yes No No No No Yes 5
Tottenham No Yes Yes Yes No Yes Yes Yes Yes Yes 8
Manchester
United Yes Yes Yes Yes Yes Yes Yes Yes Yes No 9
Southampton No No No No No No No No No No 0
Stoke No No No No No No Yes No No No 1
Newcastle
United Yes Yes No No No No No Yes No No 3
Crystal
Palace No No No No No No No No No No 0
Swansea City No No No No No No No No Yes No 1
West Ham
United No Yes No No No No No No No No 1
Sunderland No No No No No No No No No No 0
Aston Villa No No No Yes Yes Yes No No No No 3
Hull City No No No No No No No No No Yes 1
West
Bromwich
Albion No No No No No No No No No No 0
Norwich City No No No No No No No No No No 0
Fulham No No No No Yes No No No No No 1
Cardiff City No No No No No No No No No No 0
26
appearances league positions in the 2013/2014 season, Arsenal, Chelsea,
Everton, Liverpool, Manchester City, Manchester United, Newcastle and
Tottenham were selected for analysis in this thesis. Furthermore, Peeters &
Szymanski (2014) stated that the acceptable deviation clause would naturally
mean that clubs whose expenses are not up to €45million would have no
issue with the break-even requirement of FFP. Thus, this thesis ensured that
all clubs selected had expenses in excess of €45million. Finally, given that
FFP has been in existence for five financial years, this thesis gathered the
financial statements for the selected clubs for the five years and also for five
years prior to FFP introduction so as to have a good range for comparison.
3.5 DATA SOURCES
All the data used in this thesis are from secondary sources. Specifically, the
financial statements contained in the annual reports of the clubs are used.
These annual reports are obtained directly from the websites of the clubs and
in some cases, they had to be obtained via Companies house. For example
all the annual reports of Arsenal, Everton and Tottenham were available on
their website; however for clubs like Newcastle, Manchester United and
Manchester City some of the annual reports had to be purchased from
Companies house. For Chelsea and Liverpool all annual reports had to be
purchased from Companies house.
3.6 HYPOTHESIS DEVELOPMENT
Consistent with positivism, this thesis develops its hypotheses from the
existing body of knowledge. The hypotheses are a product of the prevalent
issues within the FFP literature namely - profitability (lack of it), indebtedness,
financial doping (which results in negative equity) and employee benefits
expense. The introduction of FFP aims to improve these situations; hence
they are used as yard sticks by this thesis.
3.6.1 PROFITABILITY
The literature on FFP is saturated with highlights which show the extent of
losses that European clubs have reported in the past ten to twenty years. The
27
work by the likes of Morrow (2006), Muller et al, (2012) and Kennedy &
Kennedy (2012) extensively dwelt on financial losses prior to introduction of
FFP. As rightly pointed out by Budzinski (2014), the profitability of a club in
relation to FFP is determined by the club’s relevant income and relevant
expenses and thus UEFA’s break-even requirement is aimed at ensuring
improvement in profitability. Furthermore, two of the six objectives of FFP as
presented by UEFA relate to profitability; namely 1) improvement in the
viability of football clubs and 2) promoting a culture of no spending more than
what is earned. Consequently, this study proposes the hypothesis below:
Hypothesis 1 (H1): The profitability of the EPL clubs surveyed has improved
since the introduction of FFP.
3.6.2 INDEBTEDNESS
As losses accumulated, clubs in Europe started seeking alternative sources to
improve their cash-flow and remain competitive; this led to financial doping.
Muller et al, (2012) questioned how equitable financial doping is because of
the advantage it gives to clubs that are able to find sugar daddies. However,
they found out that financial doping was building up high levels of debts.
These debts were already becoming worrisome as clubs started going
bankrupt; a famous case being that of Portsmouth (Drut and Raballand,
2012). Consequently, the payables indicator of FFP was introduced to ensure
that debt levels reduced. As such this thesis puts forward the following
hypothesis:
Hypothesis 2 (H2): There has been a reduction of indebtedness of the EPL
clubs surveyed since the introduction of FFP.
3.6.3 NEGATIVE EQUITY
Negative equity occurs when the assets of a company are less than its
liabilities, i.e. total liabilities > total assets. Negative equity is as a result of
piled up losses and debts. The works of Franck and Lang (2014), Muller et al,
(2012), and Franck (2014) clearly highlight the prevalence of negative equity
among European clubs. For example, Franck and Lang (2014) found that
36% of clubs in Europe had negative equity in 2010. As a result of this, UEFA
28
through FFP, introduced the negative equity indicator, which requires clubs to
have positive equity or in the least, have an improvement in negative equity
(that is reduction in negative equity). Consequently, the hypothesis below is
developed:
Hypothesis 3 (H3): Equity position of the surveyed EPL clubs has improved
subsequent to the introduction of FFP.
3.6.4 WAGE-AS-A-PERCENTAGE-OF-REVENUE
The employee benefits expense of a club which is a combination of wages,
transfer fees and other welfare packages is the most significant expense a
club incurs and it has been highlighted as one of the main causes of
increased losses among clubs in Europe. Szymanski (2012) in his study said
the increase in losses is no surprise as expenses on wages have more than
double in thirty years. Furthermore, studies by Muller et al, (2012), Franck and
Lang (2014), Schubert and Konecke (2015) revealed that the increase in
employee benefits expense has reached a level where it is greater than the
revenue of clubs. In the light of this, the FFP regulation requires clubs to
reduce their wage to revenue percentage and as such advised that clubs
should ensure it does not exceed 70%. It is on this basis that this thesis
presents the hypothesis below:
Hypothesis 4 (H4): Subsequent to the introduction of FFP, the wage-to-
revenue percentage of the surveyed EPL clubs was within the advised 70%
mark.
3.7 DEFINITION AND MEASUREMENT OF VARIABLES
This thesis is concerned with the change in certain elements of clubs finances
as a result of the introduction of FFP regulations. Hence, the elements could
be seen as the dependent variables and FFP regulation as the independent
variable. The dependent variables are defined in table 3.3 below and the
measurement of their performance is also detailed.
29
Dependent
Variable
Definition of improvement Measurement
Profitability Improvement is Increase in profit for
the year or decrease in loss for the
year
Relevant income – relevant
expenses
Indebtedness Improvement is reduction in total
debts
Current liabilities + Non-
current liabilities
Negative equity An improvement is when the asset
to liabilities position improves in the
positive.
Total assets – total
liabilities
Wage to revenue Improvement is a reduction in the
percentage
Employee benefits
expense / Revenue
Table 3.3 Definition of dependent variables’ performance and measurement
3.8 DATA ANALYSIS
As indicated earlier, all the data used for this thesis are obtained from the
financial statements of the surveyed clubs. Before analysis was carried out, all
the data within the financial statements were manually inputted onto Microsoft
Excel. This was done so as to be able to generate graphs and tables.
Furthermore, FFP requires certain adjustments to be made to the financial
statements therefore manually inputting the figures enabled these
adjustments to be made. For example depreciation, amortisation and
impairment of fixed assets, profit or losses on disposal of fixed assets and
taxation are all excluded from the calculation of relevant income and relevant
expenses (UEFA, 2013). Furthermore, the employee benefits expense was
included in the cost of sales and this had to be singled out. All these
adjustments had to be made for the ten statements of each club so as to have
the accurate data for analysis. Microsoft Excel was used to calculate the
figures required (see table 3.3 above) and also used to generate tables and
graphs which enumerated the findings.
30
CHAPTER FOUR
RESULTS AND ANALYSIS
4.1 INTRODUCTION
The aim of this chapter is to present the results of the analyses carried out.
Specifically, the results from the eight clubs surveyed between 2005 and 2014
are presented with regard to the hypotheses discussed in the previous
chapter. As a recap, this thesis seeks to find out whether there has been an
improvement in the financial performance of the surveyed EPL clubs since the
introduction of FFP in 2010.
In carrying out the analyses, a distinction is made for the period prior to
introduction of FFP -between 2005 and 2009 (“pre-FFP”) - and for the period
after introduction -between 2010 and 2014 (“post-FFP”). The distinction is
made because FFP has been in application for five years and as such a five
year pre introduction analysis is carried out so as to equal years for
comparison. The sections that follow present the results of the analysis for
each hypothesis which was carried out using Microsoft Excel.
4.2 HYPOTHESES TESTING
4.2.1 Hypothesis 1
Hypothesis 1 (H1): The profitability of the EPL clubs surveyed has improved
since the introduction of FFP
In testing hypothesis 1, profitability was measured using the profit or loss
figures for each surveyed club over the analysis period (2005-2014). The
profit or loss figures used are in line with UEFA guidelines on relevant income
and expenses in determining profit or loss. Table 4.1 below distinguishes
profit or (loss) figures for the pre-FFP and post-FFP periods.
31
Profit/(Loss) for the years 2005-2014
2005 2006 2007 2008 2009 TOTAL 2010 2011 2012 2013 2014 TOTAL
Arsenal £19,265,000 £15,885,000 £5,573,000 £36,668,000 £45,512,000 £122,903,000 £55,968,000 £43,192,000 £36,588,000 £6,654,000 £4,668,000 £147,070,000
Chelsea (£140,434,000) (£80,193,000) (£74,791,000) (£66,175,000) (£44,307,000) (£405,900,000) (£70,393,000) (£67,418,000) £1,378,000 (£50,655,000) £19,068,000 (£168,020,000)
Everton £20,696,000 (£10,958,000) (£9,689,000) (£6,922,000) £15,000 (£6,858,000) (£3,132,000) (£13,845,000) (£9,106,000) £1,584,000 £28,230,000 £3,731,000
Liverpool £9,463,000 (£5,161,000) (£21,655,000) £10,199,000 (£16,084,000) (£23,238,000) (£19,880,000) (£49,317,000) (£40,522,000) (£49,793,000) £920,000 (£158,592,000)
Manchester City (£15,624,000) £10,062,000 (£11,035,000) (£32,648,000) (£92,562,000) (£141,807,000) (£121,300,000) (£197,491,000) (£98,705,000) (£51,621,000) (£22,929,000) (£492,046,000)
Manchester United £10,764,000 (£65,015,000) (£24,321,000) (£21,183,000) £48,268,000 (£51,487,000) (£79,904,000) £29,715,000 (£4,664,000) (£8,793,000) £40,503,000 (£23,143,000)
Newcastle £620,000 (£12,033,000) (£34,197,000) (£20,309,000) (£15,197,000) (£81,116,000) (£19,894,000) £32,626,000 £1,354,000 £9,892,000 £18,725,000 £42,703,000
Tottenham (£821,000) (£11,681,000) £8,995,000 (£13,375,000) (£23,102,000) (£39,984,000) (£21,789,000) (£8,171,000) (£16,504,000) (£22,661,000) (£23,935,000) (£93,060,000)
TOTAL (£96,071,000) (£159,094,000) (£161,120,000) (£113,745,000) (£97,457,000) (£627,487,000) (£280,324,000) (£230,709,000) (£130,181,000) (£165,393,000) £65,250,000 (£741,357,000)
Table 4.1: Profit or (Loss) figures for Pre-FFP and Post-FFP periods
32
The results obtained as illustrated in table 4.1 above show that in the years
prior to FFP introduction (2005-2009), the surveyed clubs had total losses of
£627,487,000 while for the period after introduction losses were
£741,357,000. This represents an 18.1% increase in losses. However, it is
worthy of note that although losses had increased, the surveyed clubs broke-
even in 2014 for the first time in both the pre-FFP and post-FFP periods; that
is they did not making any loss.
Furthermore, the losses reduced every year (except for in 2013) in the post-
FFP period as opposed to the pre-FFP period where losses increased every
year (except for 2008 and 2009). These figures show that although total
profitability has deteriorated between pre and post FFP periods (evidenced by
increase in total losses), there has been reduction in losses every year for the
post-FFP period and even a positive result of recording profit in 2014. Going
further, as profit or (loss) figures are influenced by both relevant income and
expenses, figure 4.1 below shows the change in pattern for both measures
over the analysis period.
Figure 4.1: Graph showing relevant income and expenses for the surveyed EPL clubs
Relevant income as well as relevant expenses grew every year for both pre
and post-FFP periods (except for in year 2012 where relevant expenses fell
by .07%). However, relevant income grew at a higher average rate of 9.7%
than that of relevant expenses which grew at 8.2%. However, the sheer size
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33
of relevant expenses means that the growth of relevant income didn’t improve
the losses level.
4.2.1.1 ANALYSIS OF INDIVIDUAL PROFITABILITY OF CLUBS
Although the results in Table 4.1 reveal that in totality, the clubs recorded
losses every year except in 2014; the individual results of the surveyed clubs
tell a different story. For example, Arsenal FC recorded profits in all the
analysed years. Pursuant to this, further analyses were undertaken to provide
a clearer picture as to the individual profitability of each one of the surveyed
clubs. Hence, the following paragraphs presents the individual analysis and
results of the profit or (loss) for the clubs.
Arsenal FC
Figure 4.2: Graph showing Arsenal FC’s profit or (loss) for the year
From figure 4.2 above, Arsenal FC’s profits peaked in 2010 and have fallen
every year afterwards; however pre-FFP profit figures fell between 2005and
2007 but consistently grew from 2007-2010; whereas for the post-FFP period,
Arsenal’s profit fell in all the years considered. In totality, Arsenal’s pre-FFP
profits were £122,903,000; and £147,070,000 for the post-FFP period.
Consequently, Arsenal’s profitability has improved since the introduction of
FFP. This is explained by how relevant income and relevant expenses have
changed over the analysis period. Figure 4.3 below, shows that although
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34
Arsenal’s relevant income and expenses grew and fell simultaneously in the
period after introduction, the difference in amount was responsible for the
improved profitability.
Figure 4.3: Graph showing Arsenal’s relevant income and expenses
Chelsea FC
Figure 4.4: Graph showing Chelsea FC’s profit or (loss) for the year
The results in figure 4.4 above show that Chelsea’s profitability improved by
56.8% ; this is represented by the reduction in losses for the post-FFP period.
Also, the results reveal that the club broke-even only twice in the analysis
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35
period and this occurred in the post-FFP period (in 2012 and 2014).
Furthermore, for the change in relevant income and expenses, figure 4.5
below shows that relevant income increased more than relevant expenses;
and for the first time, in 2014, it exceeded relevant expenses hence the
improvement in profitability.
Figure 4.5: Graph showing Chelsea FC’s relevant income and expenses
Everton FC
Figure 4.6: Graph showing Everton FC’s profit/ (loss) for the year
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36
Figure 4.6 shows that Everton had the highest improvement in post-FFP
profitability of all the surveyed clubs by recording a 154.4% increase; breaking
even in three of the five post-FFP years. This improvement, as seen in figure
4.6 is as a result of relevant income growing at a higher amount than relevant
expenses since introduction of FFP. Specifically, figure 4.7 below shows that
Everton FC’s 2014 relevant income, which rose by 45.8%, was the main
contributing factor to their improved performance.
Figure 4.7: Graph showing Everton FC’s relevant income and expenses
Liverpool FC
Figure 4.8: Graph showing Liverpool FC’s profit/ (loss) for the year
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37
Figure 4.8 reveals that Liverpool FC’s profitability for the post-FFP period by
582.5%. This increase in losses was due to relevant expenses consistently
exceeding relevant income in the post-FFP period (see figure 4.9 below). It is
also noteworthy that Liverpool FC broke even in 2014 in the post-FFP period;
but this was not enough to improve their profitability.
Figure 4.9: Graph showing Liverpool FC’s relevant income and expenses
Manchester City FC
Figure 4.10: Graph showing Manchester City FC’s profit/ (loss) for the year
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38
Figure 4.10 shows that Manchester City FC’s profitability worsened as they
recorded a 240% increase in losses in the post-FFP period. The worsened
profitability was caused by relevant expenses increasing much higher than
relevant income. Figure 4.11 below shows that though relevant income
increased every year and also reached its peak in the post-FFP period, the
higher increase in relevant expenses for the same period caused the growth
of losses.
Figure 4.11: Graph showing Manchester City FC’s relevant income and expenses
Manchester United FC
Figure 4.12: Graph showing Manchester United FC’s profit/ (or) (loss) for the year
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39
Manchester United FC’s post-FFP profitability as seen in figure 4.12 improved
by 55.1% signalling a drop in losses of £56,761,000 from the pre-FFP period.
The fall in losses as shown in figure 4.13 below was as a result of relevant
income rising more than relevant expenses.
Figure 4.13: Graph showing Manchester United FC’s relevant income and expenses
Newcastle FC
Figure 4.14: Graph showing Newcastle FC’s profit/ (or) (loss) for the year
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40
Newcastle FC’s post-FFP profitability saw an improvement of 152.6% from the
pre-FFP period. The post-FFP results for Newcastle FC saw the club record
decrease in losses (2010) and thereafter breaking even and recording profits
for 4 consecutive years. This improvement was as a result of a combination of
increase in relevant income and reduction of relevant expenses as seen in
figure 4.15 below.
Figure 4.15: Graph showing Newcastle FC’s relevant income and expenses
Tottenham FC
Figure 4.16: Graph showing Tottenham FC’s Profit or (loss) for the year
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41
Figure 4.16 shows that Tottenham recorded increase in losses of £53,076,000
which led to a 152.6% decline in profitability for the post-FFP period. This
increase in losses as seen in figure 4.17 was due to relevant expenses rising
at a higher rate than the rise in relevant income in the post-FFP period.
Figure 4.17: Graph showing Tottenham FC’s relevant income and expenses
4.2.2 Hypothesis 2
Hypothesis 2 (H2): There has been a reduction of indebtedness of the EPL
clubs surveyed since the introduction of FFP.
Indebtedness as explained earlier is as a result of total liabilities. That is the
amounts a club owes to external parties. Table 4.2 represents the results of
the analysis for the surveyed clubs.
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42
Total Debt
2005 2006 2007 2008 2009 TOTAL 2010 2011 2012 2013 2014 TOTAL
Arsenal £345,950,000 £488,943,000 £566,137,000 £644,455,000 £606,844,000 £2,652,329,000 £438,718,000 £407,016,000 £413,225,000 £424,652,000 £469,510,000 £2,153,121,000
Chelsea £320,768,000 £342,488,000 £363,430,000 £489,490,000 £129,290,000 £1,645,466,000 £149,365,000 £282,728,000 £193,705,000 £183,349,000 £202,422,000 £1,011,569,000
Everton £47,814,000 £55,587,000 £66,265,000 £84,176,000 £89,788,000 £343,630,000 £94,547,000 £89,170,000 £85,437,000 £91,132,000 £108,649,000 £468,935,000
Liverpool £97,646,000 £102,788,000 £149,031,000 £227,402,000 £256,617,000 £833,484,000 £257,552,000 £228,252,000 £219,131,000 £274,912,000 £269,537,000 £1,249,384,000
Manchester City
£153,139,000 £143,415,000 £149,016,000 £223,976,000 £366,980,000 £1,036,526,000 £208,105,000 £246,456,000 £218,994,000 £213,678,000 £202,471,000 £1,089,704,000
Manchester United
£105,442,000 £371,390,000 £682,906,000 £666,383,000 £738,778,000 £2,564,899,000 £770,743,000 £796,765,000 £712,051,000 £670,351,000 £717,061,000 £3,666,971,000
Newcastle £134,069,000 £146,712,000 £162,728,000 £178,768,000 £206,701,000 £828,978,000 £191,871,000 £180,654,000 £176,316,000 £179,168,000 £176,481,000 £904,490,000
Tottenham £56,886,000 £105,460,000 £135,804,000 £174,584,000 £229,343,000 £702,077,000 £217,668,000 £210,485,000 £204,791,000 £193,939,000 £255,714,000 £1,082,597,000
TOTAL £1,261,714,000 £1,756,783,000 £2,275,317,000 £2,689,234,000 £2,624,341,000 £10,607,389,000 £2,328,569,000 £2,441,526,000 £2,223,650,000 £2,231,181,000 £2,401,845,000 £11,626,771,000
Table 4.2: Indebtedness of surveyed EPL clubs
43
From table 4.2 above, the total indebtedness of the surveyed clubs increased
by 9.6% in the post-FFP period. However, since the results of profitability
indicates that the total results of the clubs might not necessarily be
representative of the individual clubs, the following paragraphs shows
movement in total debts for the individual clubs.
Arsenal FC
Figure 4.18: Graph showing Arsenal FC’s total debts
As indicated in figure 4.18, Arsenal FC’s post-FFP total debt reduced by
18.8% and this was largely as a result of the 27.7% and 7.2% falls in 2010
and 2011 because subsequent to those falls, total debts increase for three
successive years.
Chelsea FC
Figure 4.19: Graph showing Chelsea FC’s total debts
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Figure 4.19 above shows that Chelsea FC’s total debts reduced by 38.5% in
the post-FFP period. However, this fall in the post-FFP total debts was
significantly as a result of the 73.6% fall which had occurred in the last year
(2009) of the pre-FFP period.
Everton FC
Figure 4.20: Graph showing Everton FC’s total debts
The results illustrated in figure 4.20 show that Everton FC’s total debts
increased by 36.5% in the post-FFP period. This increase occurred because
the three cumulative (2010, 2013, and 2014) rise in total debts was higher
than the two consecutive falls in total debts that occurred in 2011 and 2012.
Liverpool FC
Figure 4.21: Graph showing Liverpool FC’s total debts
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Figure 4.21 reveals that Liverpool FC’s post-FFP total debts increased by
49.9% even though there was a reduction in total debts in three (out) of the
five years-2011, 2012 and 2014. The amount by which total debts increased
in 2013 was the main reason for increase in indebtedness for the post-FFP
period.
Manchester City FC
Figure 4.22: Graph showing Manchester City FC’s total debts
Figure 4.22 shows that Manchester City FC’s post-FFP indebtedness
increased by 5.1% even though total debts in 2010 had fallen by 56.7%. This
is due to Manchester City FC’s total debts remaining largely in-between
£200,000,000 and £250,000,000 without any significant movement in the
post-FFP period.
Manchester United FC
Figure 4.23: Graph showing Manchester United FC’s total debts
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46
Manchester United’s indebtedness increased by 43% in the post-FFP period
and as illustrated in figure 4.23, this increase was because total debts did not
significantly reduce in the post-FFP period. The total debts remained between
£700 million and £800 million in the post-FFP period after the 547.7%
increase between 2005 and 2007.
Newcastle FC
Figure 4.24: Graph showing Newcastle FC’s total debts
Newcastle FC’s post-FFP indebtedness as illustrated in figure 4.24 above
grew by 9.1% although there were successive reductions in four out the five
post-FFP years. The increase in indebtedness is because the post-FFP total
debts remained between £150 million and £200 million without any major
movements.
Tottenham FC
Figure 4.25: Graph showing Tottenham FC’s total debts
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47
Figure 4.25 shows that Tottenham FC’s indebtedness increased by 54.2% in
the post-FFP period. This is as result of total debts largely remaining constant
between £200,000,000 and £250,000,000 in the post-FFP period after total
debts had increase from £56million in 2005 to £229million in 2009.
4.2.3 Hypothesis Three
Hypothesis 3 (H3): Equity position of the surveyed EPL clubs has improved
subsequent to the introduction of FFP. (Please turn to the next page)
48
Equity
2005 2006 2007 2008 2009 TOTAL 2010 2011 2012 2013 2014 TOTAL
Arsenal £122,656,000 £130,558,000 £133,374,000 £159,100,000 £194,330,000 £740,018,000 £255,322,000 £267,955,000 £297,548,000 £303,355,000 £310,618,000 £1,434,798,000
Chelsea £61,697,000 £81,464,000 £6,672,000 (£59,000,000) £236,605,000 £327,438,000 £162,325,000 £95,403,000 £263,181,000 £298,946,000 £370,609,000 £1,190,464,000
Everton £434,000 (£10,360,000) (£19,787,000) (£19,761,000) (£26,681,000) (£76,155,000) (£29,774,000) (£35,187,000) (£44,293,000) (£42,696,000) (£14,464,000) (£166,414,000)
Liverpool £43,139,000 £38,882,000 £19,704,000 £30,225,000 £14,039,000 £145,989,000 (£5,896,000) £45,780,000 £5,258,000 (£44,592,000) (£44,179,000) (£43,629,000)
Manchester City
£28,527,000 £38,589,000 £57,177,000 £24,529,000 (£30,889,000) £117,933,000 £293,459,000 £272,660,000 £326,358,000 £435,262,000 £572,333,000 £1,900,072,000
Manchester United
£180,846,000 £484,801,000 £459,297,000 £432,141,000 £455,507,000 £2,012,592,000 £777,243,000 £220,423,000 £235,097,000 £447,960,000 £498,650,000 £2,179,373,000
Newcastle £30,415,000 £16,755,000 (£15,937,000) (£36,253,000) (£51,450,000) (£56,470,000) (£68,541,000) (£35,922,000) (£34,557,000) (£24,665,000) (£5,947,000) (£169,632,000)
Tottenham £45,813,000 £29,956,000 £48,560,000 £42,610,000 £62,063,000 £229,002,000 £70,501,000 £81,483,000 £76,897,000 £78,425,000 £183,686,000 £490,992,000
TOTAL £513,527,000 £810,645,000 £689,060,000 £573,591,000 £853,524,000 £3,440,347,000 £1,454,639,000 £912,595,000 £1,125,489,000 £1,451,995,000 £1,871,306,000 £6,816,024,000
Table 4.3: Cumulative Equity position of the surveyed EPL clubs
49
From the above table, the cumulative post-FFP equity position of all the
surveyed clubs stood at £6.8billion which represents a 98.1% increase in the
pre-FFP equity position. This means that the surveyed clubs’ net assets
almost doubled in the post-FFP period. Furthermore, in totality there was no
year over the analysis where the surveyed clubs reported negative equity. In
addition, the total Net assets of the surveyed clubs for the post-FFP period
increased every year besides 2011, when there was a 73.5% fall from the
previous year’s figure. Also, table 4.3 shows that not all surveyed clubs
recorded individual improved equity positions as some actually had negative
equity positions. The following paragraphs show the individual results of the
clubs that recorded negative equity positions.
Everton FC
Figure 4.26: Graph showing Everton FC’s Net assets/ (Liabilities) position
Figure 4.26 shows that Everton FC reported a negative equity position in all
but one (2005) of the analysed years. Also, the total net liabilities for the post-
FFP period worsened by 118.5% even though the 2014 net liabilities made an
impressive 66.1% reduction from the previous year.
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50
Liverpool FC
Figure 4.27: Graph showing Liverpool FC’s Net assets/ (liabilities) position
Figure 4.27 shows that Liverpool reported negative equity in three of the five
post-FFP years and cumulatively, their equity position had worsened by
129.9%. Also, Liverpool FC experienced their worst equity position results
between 2011 and 2013 where they went from having Net assets of
£45million to recording net liabilities of £44million.
Newcastle FC
Figure 4.28: Graph showing Newcastle FC’s Net assets/ (liabilities) position
Figure 4.28 shows that Newcastle FC reported a negative equity position in
seven out of the ten years analysed. Furthermore, they recorded negative
equity in all the five post-FFP years. However, it is pertinent to note that
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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
£'0
00
,00
0
Net assets/(Liabilities)
Net assets/(Liabilities)
51
although Newcastle FC’s cumulative equity position was in the negative, they
recorded an improvement in net liabilities in every year for the post-FFP
period.
4.2.4 HYPOTHESIS FOUR
Hypothesis 4 (H4): Subsequent to the introduction of FFP, the wage-to-
revenue percentage of the surveyed EPL clubs was within the advised 70%
mark.
52
Table 4.4: Cumulative Wage-as-a-Percentage of Revenue
2005 2006 2007 2008 2009 TOTAL 2010 2011 2012 2013 2014 TOTAL
Revenue £841,541,000 £857,075,000 £1,030,885,000 £1,224,557,000 £1,334,213,000 £5,288,271,000 £1,432,968,000 £1,480,192,000 £1,549,956,000 £1,753,846,000 £2,089,610,000 £8,306,572,000
Employee Benefits £468,023,000 £526,077,000 £567,740,000 £709,916,000 £758,647,000 £3,030,403,000 £838,208,000 £978,274,000 £1,014,324,000 £1,097,769,000 £1,168,609,000 £5,097,184,000
Wage as a % of Revenue 55.6% 61.4% 55.1% 58.0% 56.9% 57.3% 58.5% 66.1% 65.4% 62.6% 55.9% 61.4%
53
Table 4.4 above shows that cumulatively for all clubs surveyed, wage-as-a-
percentage-of-revenue stood at 57.3% for the pre-FFP period while that of the
post-FFP period increased by 7.2% to stand at 61.4% for the period after
introduction. As wage-as-a-percentage-of-revenue is determined by both
revenue and employee benefits, figure 4.29 reveals that the increase was due
to employee benefits rising at a higher rate than revenue even though the
latter grew successively.
Figure 4.29: Graph showing surveyed EPL clubs’ Employee benefits and Revenue
Although wage-as-a-percentage-of-revenue increased in the post-FFP period,
it however remained within the 70% threshold. Furthermore, out of the eight
clubs surveyed two clubs had their wage as a percentage of revenue above
70%. As such, the next paragraph presents these clubs individual results.
Chelsea FC
Chelsea FC’s wage-as-a-percentage-of-revenue remained above the
stipulated 70% level even though it decreased by 7.4% - from 77.2% for the
pre-FFP to 71.5% for the post-FFP period. Figure 4.30 shows that the year on
year increase of in revenue in the post-FFP period coupled with the reduction
in employee benefits in 2012 accounted for the improvement.
£0
£500
£1,000
£1,500
£2,000
£2,500
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
£'0
00
,00
0
Revenue and Employee Benefits Expense
Revenue Employee Benefits
54
Figure 4.30: Graph showing Chelsea FC’s revenue and employee benefits
Manchester City FC
Figure 4.31 reveals that Manchester City FC’s post-FFP wage-as-a-
percentage-of-revenue was 79.7% which represents a 13.3% increase from
the pre-FFP period. The result was due to rise in employee benefits rather
than a fall in revenue. However, the results reveals that for the first time,
revenue was above employee benefits expense in 2012 and this continued
throughout the analysis period but was not able to reduce Manchester City’s
wage-as-a-percentage-of-revenue.
Figure 4.31: Graph showing Manchester City FC’s revenue and employee benefits
£0
£50
£100
£150
£200
£250
£300
£350
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
£'0
00
,00
0
Revenue and Employee benefits
Revenue Employee benefits expense
£0
£50
£100
£150
£200
£250
£300
£350
£400
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
£'0
00
,00
0
Revenue and Employee Benefits
Revenue Employee benefits expense
55
CHAPTER FIVE
DISCUSSIONS
5.1 INTRODUCTION
This thesis was undertaken to find out whether the financial performance of
the surveyed EPL clubs improved after the introduction of FFP regulation by
UEFA; thus a study and comparison of the financial results of the clubs over a
ten year period (five years before introduction and five years post
introduction), 2005-2014, was embarked upon to achieve this. As well as
examining the clubs as a whole, individual club analyses was also carried out.
The preceding chapter presented the results of the analyses of the financial
results with respect to the research hypotheses of the thesis. As such, the aim
of this chapter is to discuss and evaluate the empirical results with a view to
identify any trend which could possibly provide an answer to the research
question and achieve the set out research objectives.
5.2.1 HYPOTHESIS ONE
Hypothesis 1 of this thesis suggested that the profitability of EPL clubs have
improved subsequent to the introduction of FFP. Profitability, as earlier stated,
is a function of the interactions of relevant income and relevant expenses.
Where the latter exceeds the former, losses occurs and where the reverse is
the case, profits occurs. Hence, profitability is either an increase in profit or a
decrease in losses. Therefore hypothesis 1 stated above is rejected due to
the results presented in chapter four. The results indicate that the clubs
combined profitability deteriorated after the introduction of FFP. The
deterioration in this case was due to increased losses rather than reduction in
profit. More specifically, relevant expenses exceeded relevant income in four
of the five years. This is consistent with the findings of Muller et al., (2012) as
well as Frank & Lang (2014) which found that clubs consistently spent above
what they earned.
However the results also show that for the first time, in 2014, a profit figure
was achieved. In other words what was earned (relevant income) exceeded
what was spent (relevant expenses). Although the results suggest a
56
reduction in profitability, the analysis revealed that the post-FFP losses
reduced successively (except in 2013). This suggests that the magnitude of
the losses experienced post-FFP is responsible for the fall in profitability
rather than year on year deterioration.
Although the collective profitability of the surveyed clubs did not improve post-
FFP, the results of further analyses reveal that individually, club’s profitability
reacted in different ways after the introduction of FFP. For example Arsenal,
Chelsea, Everton, Manchester United and Newcastle all recorded
improvement in profitability with Everton having the best result of 154.4%
improvement in profitability; whereas Manchester City, Liverpool and
Tottenham had a deterioration in profitability with Liverpool having the worst
with 582.5% reduction in profitability. In addition, the results indicate identical
relationships for relevant income and relevant expenses for each individual
club; with both increasing substantially for all the clubs from the period prior to
introduction. Overall, the above results indicate that although in totality,
profitability has reduced for the surveyed clubs; each club has had varying
results as a result of FFP’s introduction.
5.2.2 HYPOTHESIS TWO
The empirical results suggest that hypothesis 2 be rejected. The results reveal
that total debts of the surveyed EPL clubs have increased in the post-FFP
period and there was no indication of improvement as in the case of
profitability. The results also show that there was no instance of successive
reduction of debts. At the best, debts reduced in a particular year and
subsequently increased the following year.
The cumulative results of the clubs are more or less the same for the
individual club results; with the exception of Arsenal and Chelsea who both
had their levels of indebtedness reduced. Chelsea’s total debt levels reduced
by the largest percentage of 38.5% in the post-FFP period. It is no surprise
that Chelsea and Arsenal had reduced debts given that they also recorded
improved profitability. Likewise, Tottenham, Manchester City and Liverpool’s
total debts increased the most and the results also showed that their
profitability reduced as well. This is consistent with the assertions by Lago et
57
al (2006), Schubert & Konecke (2015), Franck (2014) and Muller et al (2012)
that loss making clubs are more likely to have higher debts because they tend
to engage in augmentation of losses with external financing (financial doping).
5.2.3. HYPOTHESIS THREE
The third hypothesis of this thesis predicted that the Equity position of EPL
clubs have improved subsequent to the introduction of FFP. As improvement
in the equity position is signified by increase in Net Assets or Decrease in Net
Liabilities, the results of the analysis indicates that the hypothesis should be
accepted. The findings reveal that cumulatively, EPL clubs’ Net assets
doubled in the period after introduction of FFP and there was no year where
negative equity was reported. Furthermore, the analysis revealed that the Net
assets steadily increased every year after the introduction of FFP with the
exception of 2011 where there was a 73.5% fall in Net assets. As net
assets/(net liabilities) are mainly affected by but not limited to accumulated
profit(loss) and total debt level, it is possible that the fall in 2011 was due to
the peak level of indebtedness and also the highest level of losses recorded.
This is consistent with most of the literature about equity (Drut & Raballand,
2012). There is however an inconsistency identified. As indebtedness
increased in the post-FFP period, this had no effect on equity. Franck (2014),
(and) Muller et al, (2012) all assert that an increase in indebtedness would
lead to negative equity or in the least, a reduction in net assets position.
However, this did not take place.
The individual examination of the clubs however revealed that Everton,
Liverpool and Newcastle all reported Negative equity positions after the
introduction of FFP. The results suggest that the increase in level of debt was
the contributing factor for all the clubs. However, for Liverpool increase in
losses was also a factor.
58
5.2.4 HYPOTHESIS FOUR
The fourth hypothesis suggests that the wage-as-a-percentage-of-revenue of
the surveyed clubs is within the advised threshold of 70%. The results of the
analysis suggest the hypothesis be accepted. For the post-FFP period, wage-
as-a-percentage-of-revenue for the surveyed EPL clubs stood at 61.4%.
Although the hypothesis is accepted, the results indicate that the wage-as-a-
percentage-of-revenue actually increased by 7.2%. This means that the post-
FFP period saw the clubs spend more of their revenue on employee benefits
expenses. The increase in employee benefits expense is no surprise as
Schubert & Konecke (2015) and Muller et al,(2012) stated that clubs’
expenses on employee benefits is likely to have a year on year year-on-year
increase because of the quest to acquire more players to boost their chances
of on-field success. A further examination of the individual clubs revealed that
only Chelsea and Manchester City’s wage-as-a-percentage-of-revenue
exceeded the 70% threshold.
59
CHAPTER SIX
CONCLUSION
6.1 INTRODUCTION
This chapter concludes the thesis as it provides a summary of the results
obtained along with the research objectives and question. Also, limitations
and further research opportunities are also discussed.
The objective of the thesis was to find out whether the financial fair play
regulation had positively improved the financial performance of EPL clubs
since its introduction in 2010. A total of eight clubs were surveyed over a ten
year period which represents five years before and five years after the
introduction of FFP. In assessing the performance of the clubs the thesis
made use of variables that are prevalent in the FFP literature and also
indicated by the regulation issuer. The variables used are profitability,
indebtedness, negative equity and employee benefits as a percentage of
revenue. In capturing the variables, data was obtained from the financial
statements of the clubs with further adjustments being made in line with
UEFA’s definitions of the variables. An analysis was then carried out to
compare the performance of the clubs for the two periods (prior to and post
introduction). By making use of Microsoft Excel, graphs, tables and trends
were used to illustrate the results obtained. The next section summarizes the
results and conclusions from the analysis.
6.2 CONCLUSIONS
This thesis identified and examined four areas that FFP set out to achieve
improvement and the analysis results indicate that the introduction of FFP has
produced different results in the different areas. Firstly, in the area of
profitability, the statistics obtained reveal that the profitability of the surveyed
EPL clubs has deteriorated since the introduction of FFP. That is, the
cumulatively losses in the pre-FFP period (between 2005 and 2009), was less
than the cumulative losses in the post-FFP period (between 2010 and 2014).
The evidence shows that the increase in losses was due to increase in
relevant expenses rather than decrease in relevant income. Thus, this thesis
60
finds that for profitability to improve, relevant expenses have to be reduced or
relevant income must grow at a faster rate than it is already growing.
Another trend observed was that in the post-FFP period, losses reduced
every single year; this indicates that in the long run, profitability may improve if
the trend continues. In addition, the fact that the clubs cumulatively broke
even in 2014 could mean that FFP regulation as regards the break-even
requirement is achieving its goal. Furthermore, the research revealed that
individual profitability of clubs has been affected by FFP in different ways.
Secondly, there was an increase in the indebtedness level for the surveyed
clubs for the post-FFP period. One of the possible explanations for this is
financial doping. As stated above, the losses for the clubs increased and thus
it could be said that in order to balance the books, clubs resulted to sourcing
for external funds and therefore become more indebted. Once again, the
individual results of each club revealed slightly different outcomes with six out
of the eight clubs recording increase in indebtedness. In addition, it was
observed that clubs who had decrease in profitability generally had increase
in their indebtedness levels. This leads to the conclusion that the frequency
of financial doping could considerably reduce if the trend of improvement in
profitability subsists.
Thirdly, the net equity position of the surveyed clubs improved considerably in
the post-FFP period. The post FFP-period saw net asset position almost
double. This finding is in contrast with existing studies, which have theorised
that an increase in losses and debts results in a deterioration in net equity
position. However, the evidence alludes to other factors being responsible for
the seemingly abnormal improvement. For example, FFP regulation requires
owners of clubs that do not break-even to provide investments to help
improve the clubs ability to be profitable. A case of note is that of Tottenham
who recorded losses and also had indebtedness increase but surprisingly
recorded an increase in net equity position. Therefore this thesis concludes
that the requirement which mandates owner’s to investment is relevant
revenue generating ventures is aiding clubs to report improvement in equity
61
position. With that being said, three clubs still reported negative equity in the
period after introduction.
Finally, the surveyed clubs’ cumulative employee benefits expense as a
percentage of revenue wage-as-a-percentage-of-revenue) remained within
the 70% suggested threshold. This is as a result of higher revenue growth in
relation to employee benefits. However, the thesis found out that although the
clubs’ wage-as-a-percentage-of-revenue remained within the threshold, it
actually increased and if it is not controlled it could go beyond 70% in future.
This also provides evidence as to why the cumulative profitability worsened;
because employee benefits (wages) forms the major component of relevant
expenses. Furthermore, the research found that two clubs had their wage-as-
a-percentage-of-revenue) higher than the 70% mark.
In conclusion, this thesis found out that there is an inextricable link between
the four variables tested. For example, employee benefits expense affects
profitability and profitability in turn affects indebtedness and equity position.
Therefore, it is possible to conclude that a reduction in employee benefits
expense would go a long way in improving the financial performance of EPL
clubs. This is consistent with the opinion of UEFA, who have stressed the
need for caution in transfer fees and wages for football players. As regards
the research question, the results suggest that there have been cumulative
improvements in some areas of the financial performance of EPL clubs such
as in the case of equity position and wage-as-a-percentage-of-revenue;
whereas for profitability and indebtedness, there has been deterioration for
the surveyed clubs.
6.3 RESEARCH LIMITATIONS AND OPPORTUNITIES FOR FURTHER
STUDY
Although some of the statistical findings of this research are important and
could be useful for further research, there were some constrains encountered
that should be pointed out. Going past these limitations in further researches
would be a step forward. This section highlights these constrains and
suggests some solutions.
62
First of all, this thesis was only able to study eight out of the twenty clubs in
the EPL. As indicated earlier in chapter three, a selection had to be made and
this was due to a limitation in time for the research. Thus the clubs that had
qualified for UEFA competitions were chosen as a more representative
sample for the population. However an analysis of all twenty clubs would
provide more bases to generalise conclusions. Thus, an opportunity for further
research is to expand the number of sample clubs.
Secondly, this thesis was constrained by funds. Not all the financial
statements of the clubs are published because some clubs are not mandated
to do so as a result of their business structure. Thus, the researcher had to
purchase some of the financial statements from Companies house. As a
result, the researcher was constrained to only analysing eight clubs.
Thirdly, at the time of this research FFP has been in operation for five years;
therefore only five years could be analysed and compared. Therefore, future
research could go further than just five years of post-introduction.
Finally, the FFP regulations are numerous and as a result of time and word
constraint, this thesis was only able to focus on four aspects. Therefore,
further studies could go further and analyse other parts of FFP such as the
non-financial aspect like going concern indicators.
63
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