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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obtained from published and unpublished works, this has been fully acknowledged by citation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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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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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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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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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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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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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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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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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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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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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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