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The impact of the Financial Fair Play
regulations on financial distress of Dutch professional football clubs
Koen Havekes S1885278
Master Thesis in Business Administration Financial Management
University of Twente Supervisors:
Prof. Dr. Kabir Dr. Van der Burg Date: 31 March, 2021 Enschede, The Netherlands
University of Twente
Acknowledgements
This thesis represents the last phase of my master ‘Business Administration’ with a specialization in ‘Financial Management’ at the University of Twente. I would like to speak a word of thanks to a handful people who helped me during my master thesis and this study.
First of all, I would like to thank my supervisors Prof. Dr. R. Kabir and Dr. T. Van der Burg. Their role as supervisors have been of great value. Due to their guidance, feedback, knowledge and critical questions, I was able to constantly improve my master thesis. In addition, thanks to the KNVB, professional football clubs and my former employer for granting me access to the necessary data to conduct this research. Last of all, many thanks to my family and friends for their support and encouragement throughout my years of study.
Koen Havekes,
March, 2021
Abstract
European professional football clubs invest large amounts of money in football players. Previous studies found evidence that this led to financial distressed situations. To improve the financial position of European football clubs, the UEFA implemented Financial Fair Play regulations in 2011. This study investigated for 11 Dutch professional football clubs the impact of: (1) player expenditures on financial distress, (2) Financial Fair Play on financial distress, (3) Financial Fair Play on the relation between player expenditures and financial distress. OLS regressions are performed for a sample of 110 club-year observations between 2008 and 2018. The results found evidence that player expenditures positively impact financial distress. Furthermore, there is strong evidence for a negative impact of Financial Fair Play on financial distress, which means that Financial Fair Play regulations improved the financial position of Dutch football clubs. Lastly, no unambiguous evidence is found for an impact of Financial Fair Play in the relation between player expenditures and financial distress. This study contributes to the scarce literature about Financial Fair Play by analysing a unique Dutch sample.
Keywords: Financial Fair Play, financial distress, player expenditures, overinvestment, soft
budget constraints
Table of Contents
1. Introduction... 1
1.1 Introduction of the topic ... 1
1.2 Dutch professional football context ... 3
1.3 Problem statement and contribution to the literature ... 4
1.4 Thesis structure ... 4
2. Literature review ... 5
2.1 Financial distress definition ... 5
2.2 Financial distress in professional football ... 6
2.2.1 Paradox ... 6
2.2.2 Overinvestment in football players ... 7
2.2.2.1 Empirical evidence ... 7
2.2.3 Soft budget constraints ... 8
2.2.3.1 Football fans ... 9
2.2.3.2 The state ... 9
2.2.3.3 Sugar daddies ... 10
2.2.3.4 Empirical evidence ... 10
2.3 Financial Fair Play ... 11
2.3.1 Purpose of Financial Fair Play ... 11
2.3.2 Regulations of Financial Fair Play ... 11
2.3.3 Punishment and control of Financial Fair Play ... 13
2.4 Impact of Financial Fair Play ... 14
2.4.1 Regulating overinvestment in players ... 14
2.4.2 Hardness of the budget constraints ... 15
2.4.3 Empirical evidence ... 16
2.5 Hypotheses development ... 18
2.5.1 Hypothesis 1: Player expenditures on financial distress ... 18
2.5.2 Hypothesis 2: Financial Fair Play on financial distress ... 18
2.5.3 Hypothesis 3: Financial Fair Play in player expenditures on financial distress ... 19
2.5.4 Hypotheses summary ... 19
3. Methodology ... 20
3.1 Regression models ... 20
3.1.1 Fixed/random effects model ... 21
3.1.2 Ordinary least squares model ... 21
3.1.3 Seemingly unrelated model ... 22
3.1.4 Method of this study ... 22
3.2 Research model ... 22
3.2.1 OLS assumptions ... 22
3.2.2 Model 1: Player expenditures on financial distress ... 23
3.2.3 Model 2: Financial Fair Play on financial distress ... 24
3.2.4 Model 3: Moderating impact of Financial Fair Play ... 24
3.3 Measurement of variables ... 24
3.3.1 Dependent variables ... 24
3.3.2 Independent variables ... 26
3.3.3 Moderator variable ... 27
3.3.4 Control variables ... 27
3.3.5 Variable definitions ... 29
4. Data ... 30
5. Results ... 31
5.1 Outliers ... 31
5.2 Descriptive statistics ... 31
5.3 Correlation matrix ... 33
5.4 Regression results ... 35
5.4.1 Player expenditures on financial distress ... 35
5.4.2 Financial Fair Play on financial distress ... 37
5.4.3 Moderating impact of Financial Fair Play... 37
5.5 Robustness Tests ... 40
5.5.1 Lagged variables ... 40
5.5.1.1 No lagged variables ... 40
5.5.1.2 Two year lagged variables ... 40
5.5.2 Split Sample ... 40
5.5.2.1 Top 5 clubs ... 41
5.5.2.2 Without top 5 clubs ... 41
5.5.3 Alternative variables ... 41
5.5.3.1 Alternative independent and control variables ... 41
5.5.3.2 Alternative dependent variables ... 41
6. Conclusion ... 42
6.1 Main findings ... 42
6.2 Limitations and future research ... 43
References ... 44
Appendix A: End position of football clubs in the Eredivisie (2008-2013) ... 51
Appendix B: End position of football clubs in the Eredivisie (2013-2018) ... 52
Appendix C: Sample size club-year observations ... 53
Appendix D: Sample size club-year observations in financial distress... 54
Appendix E: Tests of normality and linearity ... 55
Appendix F: Robustness test without lagged variables ... 57
Appendix G: Robustness test with two years lagged variables ... 58
Appendix H: Robustness test with only top 5 clubs ... 59
Appendix I: Robustness test without top 5 clubs ... 60
Appendix J: Robustness test with alternative independent and control variables ... 61
Appendix K: Robustness test with alternative recoded dependent variables ... 62