Making money out of football

Table 6: Regression Results

Dependent variable:
Variables in differences
	0.074 (0.023)	0.049 (0.028)	0.021 (0.036)
				0.231 (0.130)	0.245 (0.133)	0.163 (0.117)
	0.102 (0.031)	0.121 (0.037)	0.053 (0.021)	-0.039 (0.025)	-0.034 (0.030)	-0.019 (0.030)
Quotedit	0.047 (0.021)	0.053 (0.025)	0.021 (0.024)	-0.021 (0.052)	-0.031 (0.057)	-0.024 (0.060)
Divisionit	-0.108 (0.022)	-0.115 (0.024)	-0.096 (0.012)	-0.405 (0.037)	-0.399 (0.035)	-0.467 (0.038)
Promotedit	0.055 (0.021)	0.062 (0.023)	0.034 (0.012)	0.190 (0.021)	0.190 (0.021)	0.213 (0.023)
Relegatedit	-0.054 (0.022)	-0.057 (0.023)	-0.035 (0.017)	-0.194 (0.022)	-0.194 (0.022)	-0.192 (0.026)
Variables in levels
Constant	-0.084 (0.034)	-0.035 (0.047)	0.214 (0.078)	0.313 (0.176)	0.272 (0.160)	1.060 (0.237)
	-0.394 (0.131)	-0.488 (0.165)	-0.507 (0.110)
				0.169 (0.075)	0.163 (0.076)	0.106 (0.130)
	0.186 (0.053)	0.121 (0.037)	0.106 (0.029)	-0.372 (0.201)	-0.339 (0.189)	-0.739 (0.180)
Quotedit-1	0.038 (0.028)	0.069 (0.038)	0.018 (0.032)	0.051 (0.034)	0.045 (0.034)	0.032 (0.056)
Divisionit-1	-0.051 (0.032)	-0.069 (0.037)	-0.061 (0.031)	-0.168 (0.102)	-0.150 (0.094)	-0.380 (0.100)
Promotedit-1	0.077 (0.020)	0.084 (0.023)	0.066 (0.020)	0.191 (0.024)	0.188 (0.023)	0.251 (0.033)
Relegatedit-1	-0.031 (0.019)	-0.031 (0.021)	-0.030 (0.019)	-0.215 (0.026)	-0.211 (0.024)	-0.216 (0.031)
Time dummies	No	Yes	Yes	No	Yes	Yes
Fixed effects	No	No	Yes	No	No	Yes
observations	604	604	604	621	621	621
AR(1)	0.58	1.3	-2.0	-0.9	-1.2	-0.6
AR(2)	2.1	2.2	0.2	-0.53	-0.7	-2.1

W_it is total company wage expenditure of club i in year t, R_it is company turnover, and P_it is league rank on measured from 1 to 92, treating first place in Division One of the Football League as rank 21, first place in Division Two as 45, and so on. AR(1) and AR(2) are tests of first and second order serial correlation in the errors, distributed as standard normal. Figures in parenthesis are robust standard errors.

profit





Playing success

Figure 1: Profits as a function of club success

Indifference curves for utility maximising owner

profit

Indifference curves for profit maximising owner

Playing success

Figure 2: Indifference curves for profit maximising and utility maximising owners

Indifference curves for utility maximising owner


profits

I¹

I⁰


Indifference curve for profit maximising owner

(PM)*

(U)*

S(PM)*

S(U)*

Playing success

Figure 3: Equilibrium for profit maximising and utility maximising owners

References

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1 Corresponding author: The Business School, Imperial College London, 53 Prince’s Gate, Exhibition Road, SW7 2PG, UK. Tel : [phone], Fax: [phone], e-mail: [e-mail]

2 Indeed, collective selling will impair competitive balance if it leads to a disproportionate fall in the marginal revenue from winning for the small market team, see Szymanski and Kesenne (2003) for an example of this possibility.

3 The finances of football clubs can be hard to understand. In many cases wealthy patrons stand ready to guarantee debts, or local government is involved, directly or indirectly in financial support of the teams.

4 All of the teams in the Premier League in the current season (2002/03) were limited companies by 1920. For more details on the early history of English football clubs see Mason (1980), Vamplew (1988) and Tischler (1981) and Inglis (1988).

5 A third reason is that the FA disapproved of the profit motive in football and took action to try and limit commercialism by means such as imposing a limit on the maximum dividend payable by football clubs. But by the 1980s restraints such as these had lost their significance (there are other ways for clubs to reward shareholders) and the will of the FA to restrain commercialism had largely evaporated.

6 Although this is perhaps odd given the prevailing view that team owners in North America are dyed-in-the-wool profit maximisers. See Cheffins (1998) for a critical discussion of this issue.

7 Another reason why profits may decline as success increases is that fans may become disinterested in the competition because it is too predictable- this is the uncertainty of outcome hypothesis (see Szymanski (2003)) for a review of evidence on this hypothesis.

8 Szymanski and Smith (1997) derive a similar relationship.

9 Since Tottenham, Millwall and Manchester United were listed during this entire period their performance has not been considered.

10 Both of these drew heavily on the work of Roger Noll from Stanford University who dissected the profits statements of Major League Baseball teams on behalf of the players’ union in the 1980s and found that reported accounting profits significantly understated economic profits.

11 I.e. all other clubs experienced greater losses than before flotation. Chelsea Village also appears to have had higher profits before flotation, but the series is too short to make a reasonable comparison.

12 The sample is not balanced, and there are about 6% more observations in the second half of the panel.

13 There is quite a lot of variability in financial performance. Manchester United, the largest and most profitable club by far is often cited as an outlier, but omitting them from the set of clubs whose status did not change does not alter the profile of profitability that much. Without Manchester United the 92-96 average is a loss of £0.2m compared to a loss of £0.7m in the 97-01 period.

14 Preston’s performance improved by an average of ten places, which would be a significant accomplishment in the Premier League but is less impressive on the borders of the First and Second Divisions. West Bromwich’s improvement is largely associated with the last two seasons (and their subsequent promotion to the Premier League).

15 Unless the club possesses some distinctive capability that enables them to extract a better level of performance from a given player than any other club. See Szymanski and Kupyers (1999), chapter 6 for a discussion of this possibility.

16 Not least because in 1999 the UK competition authority blocked the takeover of Manchester United by the Sky broadcasting organisation, effectively prohibiting media ownership.