Financial Fair Play:
a critical review
Name: Joris Hoogenbos
Student number: 10288481
Specialization: Economics and Finance Supervisor: dhr. Maximilian Hoyer
Semester: Second
Year: 2014/2015
I hereby declare that this submission is my own work and to the best of my knowledge, it contains no material previously published or written by another person, nor material which to a substantial extent has been accepted for the award of any other degree or diploma at any educational institution, except where due acknowledgement is made in the thesis.
UEFA, the governing body of European football, introduced Financial Fair Play, which is about improving the overall financial health of European club football. UEFA has
conceived a set of regulations, in order to restore the competitive balance in the game of football. Clubs will be punished by UEFA, when they violate those regulations. In this research, the effect of the introduction of Financial Fair Play is analyzed. At first, the details and implications of Financial Fair Play are analyzed. This paper contains a literature review on the effectiveness of Financial Fair Play, as well as an empirical research on that matter. The empirical part researches the numerical effect of the introduction of Financial Fair Play on the total of earned points of the teams in the Premier League. This research shows that the achievements of the introduction of Financial Fair Play are not what they hoped for as of yet.
1. Statement of originality 2 2. Abstract 3 3. Contents 4 4. List of figures 5 5. Introduction 6 6. Literature review 9 7. Methodology 17 8. Results 22 9. Discussion of errors 27 10. Conclusion 29 11. References 31 12. Appendix 33
List of figures
1: Champions League prize money 14
2: Prize money finalists UEFA Champions League 2015 15
3: Top 10 highest salaries football players 18
4: Test for multicollinearity 22
5: Fixed effects model 23
6: Results coefficients 25
Football is a sport that was officially played for the first time in the year 1863.
Approximately 265 million people played the game in 2006 (per: FIFA.com). Football was played in over 200 countries at the start of this century. According to the
Fédération Internationale de Football Association (FIFA) approximately 1.4 billion people are believed to have an above average interest in the game of football, with a total of 26 billion combined television spectators at the World Cup of 2010, with the tournament taking a single month. These numbers make football the most popular sport worldwide, according to Encyclopædia Britannica.
Europe is the center of the football world, producing the greatest footballing talents and attracting the greatest talents of the other continents to play there. Most players want to play in Europe because of the high wages being paid and the rich history of the clubs in this continent and with that the prestige of filling in the boots of the greatest to ever play the game. The thing that really changed football from a game into the business it is today, are the large amounts of money that injected into it. In the last two decades the development of broadcasting technologies has expanded the reach and increased the income levels of European clubs at an extraordinary rate, and yet the financial state of European professional clubs seems to be depreciated (Peeters & Szymanski, 2014). In short, the biggest clubs of the biggest sport in the world are losing money. How this is possible, and how the Union of European Football Association (UEFA) is trying to solve this problem, will be researched in this paper.
In Europe, a heavy discussion is going on about the finances in the game of football. Examples of affairs, which people seem to have a problem with, are the growing
presence of oil sheiks in football. Critics speak about unfairness in the game of football, because some teams have more possibilities in buying players, developing youth players and solving debt, just because of the fact that they are run by a wealthy owner. “Many fans complain that it is unfair that wealthy owners are able to ‘buy’ a championship simply by using their financial muscle.” (Peeters & Szymanski, 2014). Schubert and Könecke (2015) even compare Financial Fair Play and the World Anti-Doping Code; they opt for the term “financial doping”. Another unfairness is the difference in rules
between countries. For example, in Holland a club can lose its license to be a
of football clubs in other countries, which are still allowed to buy in new players. For example, HFC Haarlem was declared bankrupt over a debt of 1,8 million euros (per Algemeen Nederlands Persbureau), while the likes of Real Madrid and Fc Barcelona hold debts over 200 millions euros (per Daily Mail), and they are still allowed to exist and even buy in new players for prices over 80 million euros per player. In defense of Real Madrid and FC Barcelona: a company or football club has to be able to pay off the debt eventually and those companies seem to be able to do that. The debt of Real Madrid and FC Barcelona is more solvable than the debt of HFC Haarlem. Also, some clubs are more than a football club and have to be kept alive, because the country of the club and the UEFA itself gain from the existence of those teams in their leagues.
In this paper we examine whether the introduction of the Financial Fair Play regulations have increased competitive balance in the most important competitions in Europe. We examine whether the break-even rule has changed the competitive balance of the game. The effect of the introduction Financial Fair Play on the wage to turnover ratio will be examined. We develop a fixed effects model using observational study data to determine whether violating clubs earn better results after the introduction. The fixed effects model is a statistical model used in econometrics and statistics. The model shows observational data on quantities with explanatory variables, which are considered like non-random quantities.
This will lead to the following research question:
Has the introduction of Financial Fair Play had an impact on the violating football clubs’ results?
Hypothesis: The introduction of Financial Fair Play has no impact on the results of the violating football clubs.
The next section will be a literature review on the exact regulations, objectives and results of Financial Fair Play. The section thereafter will cover the research method, which will show how and why this research was implemented. After that, a new section will show the research results that are obtained, which answers our research question
and can test the hypothesis. The next section features a discussion of the results will be presented. In the last section, there will be a conclusion and recommendations for further researches.
This literature review will contain why Financial Fair Play was implemented and it provides an insight about the objectives the UEFA held, when it was decided that
Financial Fair Play was going to be implemented. The regulations that are used to reach these objectives are also discussed. Furthermore, we will use the available literature to investigate whether the introduction of Financial Fair Play has really had its effect and we will get an insight about the question whether it will or will not work in the future.
Financial problems
Financial Fair Play was introduced because European football suffers from financial problems. Many clubs are having trouble with their finances. The UEFA showed in their financial report in 2012 that 63% of the clubs that play in the highest competition in their country, reports an operating loss. 55% of the clubs show a net loss. 38% have reported a negative net equity. Chester (1968, p.45) saw the financial deterioration of the football world really early. Chester stated that some clubs were already near bankrupt. He asked the question; who will pay off the accrued deficits and whether those clubs will survive their debts. Examples of financial problems are the cases of Saint Etienne in 1982, Bordeaux in 1991 and Marseille in 1993, all in France (Gouguet & Primault, 2006, p. 49). Ascari & Gagnepain (2006, p.78) write about Spanish clubs owing large amounts of tax money, in which cases the clubs were not able to pay the debts off. The most recent example is from Italy. FC Parma, a historical team that won three European titles, was declared bankrupt after not being able to pay the players’ wages since July last year. FC Parma will be relegated to Serie D, which is not considered professional football (via: Entertainment and Sports Programming Network, ESPN).
Financial Fair Play’s objectives and regulations
The UEFA, the administration body for association football in Europe, noticed that some clubs are in a poor financial state and that some other clubs make use of so-called “Sugar Daddies”, which can be described as wealthy owners that use their own finances to buy in talented players and eventually championships (Peeters & Szymanski, 2014). These events made ‘The Beautiful Game” less fair in terms of competitive balance.
For this reasons, Financial Fair Play (FFP) was introduced. There are not many papers written about this particular subject so far, making it difficult to see the results in the
competitive balance (Peeters & Szymanski, 2012). UEFA's Executive Committee unanimously approved the Financial Fair Play concept for the game's well being in September 2009. The clubs did not really have a voice about the introduction of Financial Fair Play. The main objective of Financial Fair Play is to restore the
competitive balance in the game of football. Sass (2012) predicts negative consequences on the long-term competitive balance due to FFP.
The most important requirement of the Financial Fair Play is the break-even requirement. This requirement is strict and when a club’s expenses exceed their incomes, it can lose its UEFA competition license.
In North American sports, there is made use of a salary cap, which is an agreement that puts a limit on the total amount of player salaries paid. Until this point, salary caps have not been used in football. An explanation for the absence of salary caps in football is the different way in which the sport is organized in comparison to the North American sports. A club that exercises a sport in which promotion and relegation exist between leagues on different levels, and with partially overlapping competitions on a national and European level, is expected to hinder a main authority that fully controls the distribution of talent (Helmut Deitl et al, 2008). The main example of the control over talent distribution of the American sports, is the draft system. The draft system gives the participating teams an opportunity to select their favorite new player. The order of draft is decided by the standings of the previous season, with the worst teams having to pick first and the best teams having to pick last. Systems like a draft system are easier to implement within one country than within a continent.
The break-even requirement is the key element of the supervision of the clubs: the relevant expenses of a club cannot exceed its relevant income any more. The relevant expenses are cost of sales; employee benefits expenses; other operating expenses; player transfer amortization or expense; finance costs UEFA (2012b, 76–82). The relevant income is: revenue (gate receipts, broadcasting rights, sponsorship and advertising, commercial activities, other operating income); player transfer profit or income: finance income, excess proceeds on disposal of tangible fixed assets UEFA (2012b, 73–76). With this regulation, the UEFA eliminated the financial inputs of the wealthy owners from the break-even requirement. Vöpel (2011) regards the break-even requirement as an effective means to enhance financial stability. Those objectives target
to protect against a sustaining over-indebtedness in European club football, which seems to be the follow-up of the ongoing competitiveness and rivalries that exist in football. The main objective is to restore the competitive balance, although it is not specifically mentioned in the objectives above.
The wealth of team owners was a major part of the financing of transfers of players. Teams that were recently taken over and that benefitted relatively much from their owners are now forced to decrease their transfer fees and player wages. When a club is qualified to play in an UEFA competition, but it cannot meet the FFP regulations, it can be punished. Examples of punishments are: a warning, a fine, withdrawal from a current competition, a deduction of points and a disqualification for further competitions. (per: UEFA). Manchester City and Paris Saint Germain are two clubs that make use of a wealthy owner (Maxcy, 2014). Both teams already transgressed the regulations of the FFP and agreed to a disposition with the UEFA. Manchester City’s employee benefit expenses could not be increased for two seasons. Paris Saint Germain are not allowed to report a break-even deficit for a single financial year until 2016, with the club’s contract with Qatar Tourism Authority adjusted to a lower fair value. Both clubs received a fine of €20 million. Their squads for the European competitions were also reduced to 21
players instead of the usual 23 players (UEFA Financial Control Body, 2014).
Manchester City and Paris Saint Germain therefore enjoyed a smaller chance of success in their respective competitions. The most important tournament of the UEFA is the UEFA Champions League. This tournament is an international club competition that generates over €1 billion per year for broadcasting contracts negotiated by UEFA, and a large part of this revenue is paid out to participating football clubs as prize money (Peeters & Szymanski, 2012). So the Champions League prize money is often a crucial source of income to the participating clubs. More about this subject, will be explained later in this section.
UEFA's Executive Committee unanimously approved a Financial Fair Play concept for the game's well being in September 2009. The concept has also been supported by the entire football family, with its principal objectives being:
• to introduce more discipline and rationality in club football finances
• to decrease pressure on salaries and transfer fees and limit inflationary effect • to encourage clubs to compete with(in) their revenues
• to encourage long-term investments in the youth sector and infrastructure • to protect the long-term viability of European club football
• to ensure clubs settle their liabilities on a timely basis (via:UEFA)
Peeters & Szymanski (2014) state that the North American salary cap would be a more powerful device to restore the competitive balance in European football than the Financial Fair Play regulations will turn out to be. Instead of a recovery of the
competitive balance, the competitive advantages of the top teams will increase even more, because the lesser teams can make less use of their wealthy investors due to the Financial Fair Play regulations. Their findings show a problem when justifying the break-even rule regarding competitive balance. The salary cap system in US sports has avoided punishment of the competition law, but the Financial Fair Play rules that restrict spending will probably break the EU competition law to sport.
The two seasons of 2011-2012 and 2012-2013 are checked in the first monitoring period 2013-2014. From the license season 2014-2015 the three previous seasons are always checked. Article 61 of the UEFA Club Licensing and Financial Fair Play
Regulations mentions an acceptable deviation of € 5 million from the break-even rule. However, in the 2013-2014 and 2014-2015 license seasons the deviation is allowed to be maximally € 45 million. In the 2015-2016, 2016-2017 and 2017-2018 license seasons, the deviation is allowed to be maximally € 30 million. This deficit has to be covered by inputs from related parties and/or equity participants. For the following monitoring periods, the amount of deviation will be even lower, but the exact numbers will be announced later. In Premier League, there is a wage restriction as well, unless a team pays less than £ 52 million, with a maximum increase of £ 4 million per year, plus any increased revenue from new commercial deals (UEFA, 2012b).
Competitive balance is the main motive for the introduction of Financial Fair Play, because European football is considered as a competitive imbalance. We look at the national champions of the four biggest competitions (England, Italy, Germany and Spain) in the periods from 1969-1970 until 1991-1992 and 1992-1993 until 2014-2015. This particular separation is used, because the Champions League was introduced in 1992-1993. We separate the three most successful teams and calculate whether they won more league titles before or after the introduction of the UEFA Champions League. It can be determined that the top three teams of all competitions after the introduction
outscore all competitions before the introduction, which leads to the conclusion that the competitive balance has decreased after the introduction. Before the introduction of the Champions League, the top three teams of the biggest four competitions won 67% of the league titles. After the introduction, this number has risen to 82%, via UEFA. What has the introduction of the Champions League to do with this sudden rise? As you can see in table 1, the prize money for this tournament has risen until a billion euros. The more prize money is paid out, the bigger the competitive imbalance becomes. Another reason is a change of rule that was implemented from the 1997-1998 season: Competitions with better success records are allowed to enter more teams, with the maximum of four teams. Logically, the four biggest competitions delivered more teams than the other competitions since then. Seventeen from the eighteen winners since 1997-1998 came from the four biggest countries, while twelve from the eighteen winners came from the four biggest countries in the eighteen seasons before the change in rules. This gives a 42% rise in winners from the biggest four competitions. It must be noted that the total of competitors from the four biggest competitions also rose. Before the 1997-1998 season four out of sixteen participants (25%) came from the four biggest competitions, while the big 4 now usually supply fifteen out of thirty-two (47%) of all contestants. Considering the fact that the prize money rose most of the years since the rule was implemented, the power of the biggest competitions has risen financially relative to the smaller competitions. The left side of figure 1 shows the amount of total Champions League prize money per year from 1996 until 2013. The year 2004 marks the only time the total prize money decreased, relatively to the previous year. Figure 1 also shows that the market pool and the fixed payouts increased every year since 2004. The
performance bonus decreased between 2004 and 2006, but increased from the year 2006 and further. The right side of figure 1 shows the distribution of the Champions
League prize money between 2004 and 2013. England earned the highest percentage of the prize money, followed by Spain and Italy, and with Germany and France completing the top 5. It must be noted that those numbers are not inflation corrected.
Figure 1: Champions League prize money (Peeters & Szymanski, 2014)
The market pool
The market pool shows the amount of television income the teams receive. The amount the teams receive in the market pool is determined by the market value of a club and the amount of contestants from that country that are still active in a particular stage of the tournament. These regulations ensure that the winner does not always receive the most money from the Champions League. In 2015 for example, FC Barcelona and Juventus met each other in the final of the competition. Figure 2 shows that, despite the FC Barcelona win, it was actually Juventus that earned the most prize money in this year’s Champions League.
per million € per million €
FC Barcelona Juventus
Participation Bonus 8,6 8,6
Market Pool 21,5 32,14 Round of 16 3,5 3,5 Quarter Finals 3,9 3,9 Semifinals 4,9 4,9 Finals 10,5 6,5 Total 57,9 63
Figure 2: Prize money two finalists UEFA Champions League 2015 (per: totalsportek.com)
The difference this year is in the market pool. The participation bonus and the bonus for each round are the same for both teams. FC Barcelona earned more money in the Finals, because they won it, and also earned more in the performance bonus category. The performance bonus category pays teams €1 million per win and €0,5 million per draw. Barcelona won five group matches, while Juventus won three group matches and drew one. Juventus earned more prize money in total than FC Barcelona did, all because of the market pool. La Liga BBVA, the highest competition level in Spain, is the best competition in the world, in which the Italian competition ranks fourth, according to UEFA Ranking of European Leagues. The Spanish league will receive the most market pool money in this year’s Champions League, but the Spanish competition delegated four participants, while the Italian competition delegated two. From the knockout stage, the Spanish competition delegated three teams and Juventus was the sole representative of the Italian competition. This is the reason why Juventus earned a bigger share of the market pool than FC Barcelona, even though they lost the final.
Criticism on Financial Fair Play
In December 2009, the EU attained direct and indirect competence in sports. The Treaty of the Functioning of the European Union (TFEU) contains substantive rights and obligations that apply to all sectors, including sectors in which EU lacks competence to introduce legislation. The Financial Fair Play regulations can be tested on two specific areas in de treaty: First, Article 45 of TFEU disallows employees to move between member states. Second, Financial Fair Play regulations could deteriorate competition: Article 101 of TFEU proscribes anticompetitive agreements and Article 102 of TFEU proscribes abuse of a dominant position (Lindholm, 2010). Within the first category,
Financial Fair Play could be considered an obstacle to free movement, because a team cannot buy a certain available player when the team does not have enough salary cap space left. When we judge the second area, we can must look at the two categories separately: abuse could be divided into three broad categories: exploitive abuse that biases consumers, abuse that injures competitors and abuse that disadvantages other enterprises for its actions. The UEFA does not seem to abuse its position by implementing the Financial Fair Play rules in any of these ways. The examples named in the Treaty’s Articles 101 & 102 are also not infringed. By looking into Article 101, we can determine whether Financial Fair Play is an anticompetitive decision. Article 101 rules out agreements between undertakings, one person challenged the FIFA in court for infringing this point. The FIFA and UEFA are considered associations of undertakings and therefore this is considered as anticompetitive. Article 101 also prohibits trade between Member States, which are clearly being used in the game of football (Lindholm, 2010). At last, Financial Fair Play could be considered anticompetitive, as salary caps in sports could cause a monopoly situation, in which only one team is able to buy a certain player. So lowering the clubs wages could actually be anticompetitive instead of it promoting competitiveness (Lindholm, 2010).
Another criticism is the fact that different countries use different tax rates. In some leagues a club has to pay much higher gross wages than in leagues from other countries, to give the player the same net wage, making it harder to land the player and also making it harder to keep the wage to turnover ratio as low as possible.
In the methodology, a set-up for the calculations of the results is given. The methodology covers the ‘how’ question of this empirical research. Besides the literature review, in which the research question was answered based on the existing literature, an empirical research on the research question is necessary. We first determine what kind of
empirical research is relevant and why it is relevant. After that, we determine the relevant formulas and data for this research, and discuss why those are used. The question we are answering in this research is:
Has the introduction of Financial Fair Play had an impact on the violating football clubs’ results?
With the hypothesis being: The introduction of Financial Fair Play has had an impact on the results of the violating football clubs.
Although Financial Fair Play was only implemented since 2012-2013, we examine the results on the short term on this subject. A good measure of the results on Financial Fair Play is the wages that a club pays to the players in relation through its own resources, the wage to turnover ratio. The salary cap in North America promotes the competitive balance in the league, but Financial Fair Play only limits the spending of the separate clubs in proportion to its own resources, which tend to fluctuate much. This leads to the observation that the competitive balance might not be restored in European football. It limits the opportunities of the smaller teams in the competitions, and therefore seem to benefit the richer clubs. The smaller clubs are not able to use a potential wealthy owner, which also does not increase the competitive balance (Peeters & Szymanski, 2012). Peeters & Szymanski (2012) also state: “Given that higher spending tends to generate better sport performance, restraining the spending of some clubs reduces the cost of winning for all clubs. Thus there will be spill over effects to clubs not directly affected by the limit, by lowering the cost of achieving a given level of success. The vertical restraint introduced by UEFA would result in a comparably anti-competitive outcome, as the horizontal agreements between competing firms, which exist in the US under the form of salary caps.”
Dietl et al. (2009) investigated the kind of cap, which was implemented by the Financial Fair Play’s break-even rule, which is the effect of a wage cap on a percentage of a team’s
income. Their research shows a decrease in the combined wages, even when the standard deviation on spending rises relative to the American style salary cap.
The wage to turnover ratio tells a lot about the degree of competitive balance in sports. As mentioned above, it could decrease the competitive balance. Another reason why the wage to turnover ratio is an interesting subject in this research is because the wage spending tells a lot about the existence of ‘Super Teams’ in football. If we assume that all players seek their maximum wage, the clubs with the highest revenues is allowed to buy in the best players, based on their salaries. The best players not only tend to get paid the most, they also tend to bring in the most revenues for the club in question. When the revenues that a player brings, move proportionally with the wages that players demand, the wage to turnover ratio would not increase, and therefore the competitive imbalance would grow even further. Figure 3 shows the football players that earn the highest wages from their clubs. This is more relevant for Financial Fair Play, because the important point is how much the club pays in wage, not how much wage the player receives in total. The amount the certain players earn from their endorsements is included however, to show the maximal amounts that players earn at this present day.
# Name Club Club salary Endorsements Total salary
1 Cristiano Ronaldo Real Madrid 52 28 80
2 Lionel Messi FC Barcelona 41,7 23 64,7
3 Zlatan Ibrahimovic
Paris Saint
Germain 36,4 4 40,4
4 Radamel Falcao Manchester United 32,4 3 35,4
5 Gareth Bale Real Madrid 25,4 11 36,4
6 Yaya Toure Manchester City 19,2 2,5 21,7
7 Wayne Rooney Manchester United 18,4 5 23,4
8 Sergio Aguero Manchester City 18,3 5 23,3
9 Fernando Torres Chelsea FC 17,8 3,5 21,3
10 Neymar FC Barcelona 17,6 16 33,6
Figure 3: Top 10 highest salaries active football players 2014 (per million €) (per: Forbes) Cristiano Ronaldo and Lionel Messi are widely considered the best football players in the world, so by theory they should earn the highest wages of all football players,
because all players seek their maximum wage. As shown in figure 3, this theory was correct in 2014.
The introduction of Financial Fair Play meant to restore the competitive balance. To research whether that objective was made, we will look at the Premier League seasons of 2012-2013 and 2013-2014, which are the last season before and the first season after the introduction. In 2013-14, fifteen clubs have made a profit, with the Premier League recording a profit collectively of £198 million. That was a big mutation relative to the season before, in which twelve out of the twenty clubs recorded a loss. The Premier League recorded a loss of £291 million during 2012-2013 (via: The Guardian).
The total of points seems the most accurate determiner of success of a football club in their respective competition. The system works as follows: All twenty teams play two times against each other with the winning team earning a reward of three points, the losing team receives no points and a draw gives both teams one point. We will look at which teams would have violated the regulations of the Financial Fair Play in the season before the introduction and which teams have indeed violated the regulations after the introduction. This would show a difference in the results of the teams that did violate the regulations beforehand, if the introduction of Financial Fair Play had success. The introduction of the Financial Fair Play is not the only determiner of the total points of the clubs. Other factors that determine success or failure of clubs are: number of
supporters, the history of a club, whether FFP was already introduced, whether FFP was violated regardless of the introduction, average age of selection, the paid wages, the turnover of a club, how many injuries were suffered during the season and whether a team played in any international competitions in that particular season. The number of supporters will be estimated with the average attendance at home games. For age, the deviation of the competition average is used.
Fixed effects model
The fixed effects model is a statistical model used in econometrics and statistics. The model shows observational data on quantities with explanatory variables, which are considered like non-random quantities. The fixed effects model explores the
our hypothesis, a model must be built in STATA, a statistical software package. In this program, a fixed effects model can be created. This model is based on the data that were used and will write a regression out of those and with that regression, the hypothesis will be tested. For the use of the fixed effects model, we assume that something within the club might impact or bias the outcome variable, which needs to be controlled, that’s why we assume a correlation between the error term of the entity with the predictor variables. Another assumption of the fixed effects model is that the time-invariant characteristics are unique to each individual club and those may not correlate with individual characteristics. The entity’s error term and coefficient may not be correlated with the other coefficients, which means that the error terms are not allowed to be correlated. The fixed effects model does not need to have a balanced panel, but it needs at least two observations per unit, which decreases the total of teams from twenty to seventeen teams.
In this case, the equation looks like this:
points
it= α + β
1*age
1t+ β
2*injuries
2t+ γ
3*ffpviol
3+ γ
4*european
4+ γ
5*viol
5+ γ
6*year
6+ u
itpoints: Total of points achieved in that years’ Premier League (DV)
age: Average age standard deviation of selection compared to competition’s average (IV) injuries: Average injuries suffered per game (IV)
ffpviol: Whether Financial Fair Play regulations were violated in a season that the regulations were introduced (BV)
european: Whether the team played in an European competition during that season (BV)
viol: Whether the Financial Fair Play regulations were violated, regardless of whether it was introduced (BV)
α: Constant
β: Coefficient for independent variables γ: Coefficient for binary variables u: Error term
i: Entity t: Time
Note: DV means Dependent Variable, IV means Independent Variable, BV means Binary Variable
This formula uses as many explanatory variables as possible, to make sure that the effect of the Financial Fair Play regulations is indeed the effect of that introduction and not that of other factors. The hypothesis needs to be written into a testable hypothesis. In this formula, we want to examine whether the introduction of Financial Fair Play has had an impact on the total of points of the teams that did violate the regulations, which means the variable ffpviol has to be tested. The hypothesis states that it will have no impact on the total of points:
H
0: t=0 and H
1:
t≠0
H0: The introduction of Financial Fair Play has had no impact on the total of points
H1: The introduction of Financial Fair Play has had an impact on the total of points
When the hypothesis does not hold, it will be rejected
In this section, the results of the research will be posted and discussed. Furthermore, the hypothesis will be tested and this will show the outcome of the empirical research. Those coefficients were chosen for the model: age, wage, turnover, history, injuries, FFP violation, participation in European competitions, a violation of FFP regardless of the season, the relevant season and the attendance.
Attendance and history have been dropped from the equation, because the model showed evidence that those coefficients had no influence on the points total, while they severely worsened the model.
A test for heteroskedasticity has been done, but this showed no proof of the presence of heteroskedasticity. Heteroskedasticy is present when the Prob > chi2 value is below 0,05, which was not the case in this model.
A test for multicollinearity has been done as well, showing a multicollinearity between the paid wages and the turnover, which was cause for elimination of those coefficients.
Figure 4: test for multicollinearity
After these tests, the model for fixed effects could be built, with the input being: xtreg points age injuries ffpviol european viol year, fe
Figure 5: Fixed effects model
Information above the table:
corr(u_i, Xb): the correlation of the errors ui and the regressors in this model is -0,3625.
This means that the error term is correlated with the predictor variables in the model. Number of obs. : Number of observations, which means all clubs that played in both seasons: 34. In this case clubs that played in the Premier League in both seasons, are counted twice.
Number of groups: 17, which is equal to all clubs that played in both seasons
Prob > F: This measures whether the model is considered good enough to use, it tests whether all coefficients in the model are different than zero. Ideally this number is below 0,05. The number in this model is: 0,1283.
Information within the table:
- Coefficient: Those indicate how much the points total changes when the regressors increase by one unit.
- t-values: The t-values test the hypothesis that each coefficient differs from zero. The t-value must be higher than 1,96 to be rejected with a 95% confidence interval. When the hypothesis can be rejected, that coefficient has a significant effect on the dependent variable, which stands for the points total in this case. The higher the t-value, the more relevant the variable is.
- P > |t|: The two-tail p-values test the hypothesis whether a coefficient differs from zero, with a rejection as a result. To reject the hypothesis with a 95% confidence interval, the p-value has to be lower than 0,05. When the p-value is lower than 0,050, the coefficient is considered significant.
- rho: This shows the percentage of the variance which is due to differences across the panels. The formula states: rho = (sigma_u)2 / ((sigma_u)2 + (sigma_e)2). This
number is 0,88328925, which is the fraction of variance due to u_i (the error term).
What those results mean
Those results were obtained to test the hypothesis, which states: H0: t=0 and H1: t≠0
H0: The introduction of Financial Fair Play has had no impact on the total of points
H1: The introduction of Financial Fair Play has had an impact on the total of points
In order to reject the hypothesis, the absolute t-value of the ‘ffpviol’ coefficient must be higher than 1,96 and with that the P>|t| value cannot exceed 0,050. When we assume that this model is accurate, we can see a t-value for ffpviol of 2,64, which is greater than 1,96. The P>|t| value is lower than 0,050, namely: 0,023. This means that, when this model is perfectly accurate, the H0 hypothesis has to be rejected. Clubs that violated the
than the teams that played within the rules, since the 95% confidence interval is: [4,090675; 45,32572]. The total confidence interval is bigger than zero. This model concludes an upward bias of the violation of Financial Fair Play on the total of points. This means that the introduction of Financial Fair Play has not had its effect on the participating teams yet. It does however warrant the introduction of the rules, because the violating teams do have an advantage, according to this model. But because of the high rho in the model, a conclusion cannot be drawn based on this model. The value of rho violates the assumption that error terms cannot be correlated. The UEFA plans to eliminate the advantage, that the model shows, and turn it into a disadvantage by punishing the violating clubs. The three English teams that violated the regulations, Manchester City, Liverpool FC and Aston Villa, did not all receive a punishment though, as only Manchester City was punished for its financial misbehavior. Liverpool FC has satisfied the break-even requirement later in 2014, while Aston Villa lowered its wages to avoid punishment. Coincidence or not, all three violating teams had a lower ranking in the 2014/2015 season than in the 2013/2014 season. The teams managed to collect 29 points less during the season of 2014/2015 than during the campaign of 2013/2014, according to Premier League. The UEFA will hope that their Financial Fair Play regulations and punishments will have a success in the end.
ο
What does this result tell about the other coefficients? Coefficient t-value Significant?
Points total
age negative -1,13 no down
injuries positive 1,6 no up
european negative -1,57 no down
viol negative -1,21 no down
year negative -1,74 no down
cons positive 5,76 yes -
Interpretation:
- Age: having an above average age, decreases the total of points, although this cannot be proven within this model. Apparently, having a young team grants better results.
- Injuries: more injuries suffered increased the total of points, although this cannot be proven within this model. This result is not what was expected, an explanation could be that better teams suffered relatively more injuries of less important players.
- European: participating in European competition, decreases the total of points, although this cannot be proven within this model. This is a logical result, since teams that play in Europe suffer more tiredness due to the amount of matches and the travelling.
- Year: the teams gathered fewer points in total in the second season than in the first season, although this model does not prove this. An explanation could be that the eliminated teams gathered more points in the second season than the eliminated teams from the first season did.
- Constant: the model showed proof that the constant has a positive value, which influences the direction of the other coefficients
Discussion of errors
The rho value, known as the intraclass correlation, determines the fraction of variance due to the error term. The rho value has a high number in this model, which means that the error term is highly correlated with other individual characteristics. This violates the assumption that error terms cannot be correlated, making the outcome of this model insignificant. So this model does not show a rejection of the hypothesis. This research cannot conclude a significance of the introduction of Financial Fair Play, based on this model.
Because of the relatively late introduction of Financial Fair Play, the statistical power of this research is low. Because only the Premier League shows enough variables of all their teams, it was the only possible competition to investigate. When UEFA would oblige every competition that deals with Financial Fair Play to enhance their transparency as regards to their finances, it would make a proper research better manageable. In my personal experience, I learned that the world of football is not
transparent at all, ignoring messages to gather data. This lack of transparency could be a cause of the financial and sportive deterioration of football. As many competitions as possible would increase the statistical power. The direction of the bias is not
determinable.
Another problem with the regression is the fact that because of mandatory relegation, three teams had to be eliminated from the model. The three teams eliminated in the first season were the three relegated teams. The three teams eliminated from the second season were the three promoted teams. Since the three promoted teams did not relegate immediately the season after, a downward bias for the total of points was created in the second season, as well as an upward bias in the first season. The eliminated teams in the second season managed to collect 23 points more than the eliminated teams from the first season.
Another factor that determines the success of a team is the participation in other
Europa League decreases the total points of the relevant team, because that team would suffer more tiredness and injuries of the players, since they play more matches and more frequently, as well as the traveling to other countries. The amount of injuries suffered could correlate with the participation in European competitions, but a test for multicollinearity showed that that was not the case in this particular seasons.
The model has a positive value for the constant, which influences the direction of the coefficients. This worsens the quality and usefulness of the model. The coefficient (48,44) is lower than the average of total points over both seasons (55,68), but the average value over both seasons lies within the 95% confidence interval ([29,93; 66,94]), making it influence the direction of the other coefficients.
The Prob > F value is ideally smaller than 0,05. This is violated in this model, which makes the model less accurate. This causes errors in the outcome of the coefficients.
Conclusion
Financial Fair Play was mainly introduced to restore the competitive balance within European Football. There were not many papers written about this particular subject so far, making it more difficult to observe the change in competitive balance. UEFA was hopeful that Financial Fair Play would change the outlook of the game of football. The key element of Financial Fair Play is the break-even requirement. Vöpel argued that the break-even requirement is an effective tool to enhance financial stability. However, not every analyst has the same positive attitude about it. Sass, for example, predicted negative consequences on the long-term competitive balance due to FFP in 2012. Another important element of Financial Fair Play is the elimination of the power of the financial muscle of wealthy owners. That was conceived to make the game more competitive, but seems to have the opposite effect, because the less fortunate clubs cannot make use of a wealthy owner to reach the same level as rich clubs. Also, the Treaty of the Functioning of the European Union considers Financial Fair Play as an anticompetitive decision, instead of it promoting the competitive balance.
In this paper, the influence of Financial Fair Play on the total of points of the clubs in the Premier League was determined. A fixed effects model analyzed the effect of the
introduction, taking other factors that determine the quality of a football club in consideration. The model showed a positive influence of the Financial Fair Play introduction on the total of points of the violating clubs. This would mean that the introduction is logical. Unfortunately, the model did not show enough evidence that it was useful, making it impossible to conclude the real effect of it, but of the violating clubs, only Manchester City received a punishment.
After theoretical and empirical research, it can be concluded that Financial Fair Play is based on good intentions, but that the implementation has not brought the results hoped for. UEFA will hope that it will bring better results in the future.
Since the phenomenon of Financial Fair Play is only in the early stages of its life, further research is a must. It is still too early to conclude whether Financial Fair Play is a step onto a financial stable and competitive balanced sport, or that it will turn out a failure.
New research on the effects can show whether the introduction of Financial Fair Play can be justified. It would be a good case, when UEFA would also promote a more
transparent world of football, so the collection of data can be improved to enhance good research this subject. When more data would be available, an accurate model can be written, so that empirical research could draw real conclusions.
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Appendix
club year points ffpviol viol history attend
Arsenal 0 73 0 0 13 60079 Arsenal 1 79 0 0 13 60013 Aston Villa 1 38 0 0 0 36080 Aston Villa 0 41 0 1 0 35060 Chelsea 0 75 0 1 4 41462 Chelsea 1 82 0 0 4 41481 Everton 0 63 0 0 9 36356 Everton 1 72 0 0 9 37731 Fulham 1 32 0 0 0 24977 Fulham 0 43 0 0 0 25394 Liverpool 0 61 0 1 18 44749 Liverpool 1 84 1 1 18 44671 Manchester City 0 78 0 1 4 46974 Manchester City 1 86 1 1 5 47080 Manchester United 1 64 0 0 20 75206 Manchester United 0 89 0 0 20 75530 Newcastle United 0 41 0 0 4 50517 Newcastle United 1 49 0 0 4 50395 Norwich City 1 33 0 0 0 26805 Norwich City 0 44 0 0 0 26672 Southampton 0 41 0 0 0 30874 Southampton 1 56 0 0 0 30211 Stoke City 0 42 0 1 0 26722 Stoke City 1 50 0 0 0 26137 Sunderland 1 38 0 0 6 41089 Sunderland 0 39 0 1 6 40544 Swansea City 1 42 0 0 0 20406 Swansea City 0 46 0 0 0 20370 Tottenham Hotspur 1 69 0 0 2 35808 Tottenham Hotspur 0 72 0 0 2 36030 West Bromwich Albion 1 36 0 0 1 25193 West Bromwich Albion 0 49 0 0 1 25360
West Ham United 1 40 0 0 0 34196
West Ham United 0 46 0 0 0 34720
turnover injuries age wage european club1
242.8 3.68 -1 154.5 1 Arsenal 298.7 7.61 -.7 166.4 1 Arsenal 116.9 5.58 -.5 71.9 0 Aston Villa 83.6 5.76 -.7 69.3 0 Aston Villa 255.8 2.13 .5 172.6 1 Chelsea 319.8 2.87 -.7 192.7 1 Chelsea 86.4 2.16 .8 63 0 Everton 120.5 5.11 1.4 69.3 0 Everton 79.3 4.11 .9 70 0 Fulham 73 3.05 2.1 67 0 Fulham 206 3.21 -2 131 1 Liverpool 256 4.13 -.7 144 0 Liverpool 271 3.68 -.8 205 1 Manchester City 346.5 3.74 1.2 233.1 1 Manchester City 433.2 5.11 .4 215.8 1 Manchester United 363.1 3.89 -.7 180.5 1 Manchester United 66.5 4.61 -.7 61.7 1 Newcastle United 129.7 5.11 -.1 78.3 0 Newcastle United 95.5 3.92 1.7 68 0 Norwich City 78.7 2.87 .5 75 0 Norwich City 71.8 1.74 -.5 41.4 0 Southampton 106 3.13 -.6 55.2 0 Southampton 75.5 1.84 2.8 60.3 0 Stoke City 98.3 2.84 1.6 60.6 0 Stoke City 69.5 3.16 .4 69.5 0 Sunderland 57.9 3.08 .6 57.9 0 Sunderland 98.7 4.03 1 62.3 1 Swansea City 67.1 2.39 1.1 48.1 0 Swansea City 180.5 5.44 -1.1 100.4 1 Tottenham Hotspur 147.4 3.37 .3 96.1 1 Tottenham Hotspur
86.8 4.76 2.1 65.4 0 West Bromwich Albion 69.7 2.79 .9 70 0 West Bromwich Albion
114.9 4.16 .8 63.9 0 West Ham United
89.8 3.03 .3 56.2 0 West Ham United
