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The Determinants of Success in
European Football Competitions

Carlos Jorge Santos Rocha
rochacj85@gmail.com

Dissertation
Master in FinanceJEL classification: G30; G32
Supervisor
Miguel Sousa

September 2014

Biographical Note
Jorge Rocha was born in Funchal, Portugal, on May 17th, 1985. In 2012 he graduated from the
University of Madeira with a degree in Management. During his degree Jorge worked at
Vodafone and participated in the Erasmus Mobility Program at the University of Maribor,Slovenia.
After finishing his degree, he started a Master in Finance degree, in 2012, at Faculty of
Economic of University of Porto (Faculdade de Economia do Porto), where he currently is.

iAcknowledgments
First I would like to express the deepest appreciation to my teacher and supervisor, Professor
Miguel Sousa, who always was very encouraging during the masters and was extremely
helpful with his comments, guidance and suggestions in order for me to complete mydissertation. Without his help, this dissertation would not have been possible.
I would also like to express my gratitude to all the friends I made in Porto, in
particular the Mil893 FC Porto supporters group, degree colleagues, Giovanni and Raquel
who walked side by side with me during these last two years.
I want to thank all my friends in Madeira for direct or indirect support, particularly to
Pedro and his girlfriend, Cristina, Hugo, Gil, Renato, “Os Mosqueteiros”, “Ratas Velhas”,
Dudu, André and the Perneta brothers.
To all my family I have no words to describe the strength and support I’ve always
received from them, specially my father, brother, sister and brother in law.
Finally, I dedicate this dissertation to my “Tia Bossa”, “Tia Lenita”, “Tio Zito” to mymother and to my unborn niece who hopefully will get a pretty name.

iiAbstract
A lot has changed in football in the last decades. These changes were mainly driven by theappearance of the mega sized Champions League and the Bosman Case, making this industry
a very good case study in the financial area. This study identifies the main determinants offootball club’s revenues and success between 2009 and 2012. This study will be abreakthrough not only in finance literature, but also in the football industry. To our best
knowledge there is no studies regarding the football industry in the field of identification of
success determinants in the European main competitions (Champions League and Europa
League) and the relation of that success (or lack of) to the club’s revenues. Our results
showed a positive correlation between market area and sportive success with higher revenues.
Regarding success, results showed that wages, total assets and capital expenditures in the year
before are positively correlated. However, the clubs that don’t control their expenses inrelation to their revenues tend to not succeed as they predicted.

Key-words: Football industry, European Competitions, Success, Revenuesiii

Contents
Biographical Note ...................................................................................................................... i
Acknowledgments..................................................................................................................... ii
Abstract .................................................................................................................................... iii
Contents.................................................................................................................................... iv
List of Graphs .......................................................................................................................... vi
List of Tables........................................................................................................................... vii
List of Attachments ............................................................................................................... viii
1. Introduction .......................................................................................................................... 1
2. Literature Review ................................................................................................................. 4
2.1. The European Football Industry ...................................................................................... 4
2.2. Steps towards the football industry sustainability ........................................................... 5
2.3. Win Maximization vs. Profit Maximization ................................................................... 6
2.4 Football industry: Efficiency and Determinants .............................................................. 7
3. Data ...................................................................................................................................... 10
3.1. Data Sources .................................................................................................................. 10
3.2. Sample Description ....................................................................................................... 11
4. The Model ........................................................................................................................... 14
4.1. Determinants of Revenues Hypothesis ......................................................................... 14
4.2. Determinants of Success Hypothesis ............................................................................ 15
5. European Competitions and the Construction of the Success Variable ....................... 175.1. European Elite play in the CL ....................................................................................... 175.2. The hardest club competition in the World ................................................................... 175.3. The Construction of the Success Variable .................................................................... 19
5.3.1. Fixed Score and Bonus Score................................................................................. 19
6. Discussion & Results .......................................................................................................... 21
6.1. Determinants of Revenues ............................................................................................ 21
6.1.1. The Real Impact of Success in Revenues ............................................................... 226.2. Determinants of Success ............................................................................................... 23
6.2.1. Results with the Success Variable .......................................................................... 23
6.2.2. Results with the Logarithmic of the Success Variable ........................................... 24
7. Conclusions ......................................................................................................................... 27
8.

References .................................................................................................................... 29iv

Appendix ................................................................................................................................. 32
Appendix 1 – Total Score - Practical Examples APPENDIX .................................................. 32
Appendix 2 – The Sample Clubs.............................................................................................. 33
Appendix 3 – Variables Formula ............................................................................................. 34
Attachments ............................................................................................................................ 35v

List of Graphs
Graph 1 – Summary statistics................................................................................................... 12
Graph 2 - Wages revenues ratio between 2009 and 2012 ........................................................ 13vi

List of Tables
Table 1 – Summary Statistics ................................................................................................... 11
Table 2 – Historical most successful teams ............................................................................. 18
Table 3 – Success Ranking Construction ................................................................................. 20
Table 4 – Determinants of Revenues ....................................................................................... 21
Table 5 – Revenues Increase Prediction vs UEFA Prize Money ............................................. 22
Table 6 – Determinants of Success 1 ....................................................................................... 23
Table 7 – Determinants of Success 2 ....................................................................................... 24
Table 8 – Log Success 1 ........................................................................................................... 25
Table 9 – Log Success 2 ........................................................................................................... 25

vii

List of Attachments
Attachment 1 – The Virtuous Circle of the Leading Clubs ...................................................... 35
Attachment 2 – The Virtuous Circle of the Small Clubs ......................................................... 36viii

1. Introduction
Before being a business, football is supposed to be an entertainment show with a very
deep social impact in almost every country in Europe, where the fans play a major rolein the club decisions and the primary objective is to win to keep the fans happy andproud.
With time, something has changed and football became a major business in
Europe where the common fans have little or nothing to say about how the club (ormore precisely the company) is managed. On one hand because they don’t understandthe new concepts of football management which encompasses planning, risk
management and financial management and on other hand because the fundamental
sports objectives which is the fans objectives can enter in conflict with the investors
intentions (Nagy, 2012).
For Peeters (2011) one of the biggest changes in European football was theappearance of the Champions League as a supranational competition. The hugefinancial compensations paid to the participants in this league have an important impact
on their performance at national level. Additionally, Champions League defines itself as
the world’s most important club competition and a good performance 1 in thiscompetition normally means a significant appreciation of the value of the assets of the
clubs while a bad campaign in that competition normally has the opposite effect.
Another important cause of this change occurred in 1995 when the European
Court of Justice ruled in the Bosman Case that the player transfer system andrestrictions on the maximum number of foreign players were illegal violations of thetreaty of Rome. Before this, players could not move freely from one club to anothereven after the end of the contract, unless the involved clubs agreed on a transfer fee andthe clubs could only hire a limited number of non-national players. These limitations onmobility kept the wages low. After those changes the financial impact was huge and thewages escalated to what was believed to be incredible levels at the time (Andreff andStaudohar 2000).
The changes occurred in European football created new reality for fans andcompany shareholders. Fans need to understand the importance that a responsible and

1

The definition of “good performance” varies according to each club expectations

1

competent financial management has for the sporting future of their team and for thesustainability of the entire industry. Shareholders need understand the relation between
winning and the value of a team as a company. A very well managed team/business isthe team/business that balances the financial and sporting performance because in thisindustry one can’t succeed without the other, (Baroncelli and Lago 2006). There areseveral known cases in which clubs went almost or completely bankrupt because of
their attempt to reach greatness in countries like England, Scotland, Portugal or Italy.
As the European football has been experiencing considerable levels of financial
instability, the annually increase of revenues across European football industry should
be seen as a golden opportunity for controlling the industry costs and enhance its
financial stability. However, what truly is happening is that teams across Europe areinvesting millions of Euros every year buying players at an increasingly price,increasing each year their payrolls with the objective of not only making good internal
championships but also to succeed in the European competitions. This behavior has
created an inflationary trend in the European football industry.
The purpose of this dissertation is to examine the main financial drivers ofsportive success in the industry of football. To do so, we will follow the Virtuous Circle
between sportive results and financial resources as Lago et al (2004). The Virtuous
Circle starts with the necessary financial power to purchase the talent needed to create
the most competitive team possible in order to achieve the better results possible. With
success the teams should increase their revenues through match day tickets,merchandising, TV rights or asset appreciation, which will be necessary to restart thecycle. This brings us to the main hypothesis that we attempt to answer on this study:
 Are the revenues of European clubs correlated with success and the economic
power of the surrounding football club area?
 What determines success of football clubs in Europe?
Although there are other studies regarding football industry determinants, theexisting literature is focused on studying national leagues, leaving a big gap in theexisting literature about the football industry: studies about the most important footballleague in the world The UEFA Champions League (CL) that as argued by Peeters(2011) is an important determinant of national success.

2

We have used data of 31 football clubs from 9 different European countries.
Football clubs in our study are among the best football clubs in the world, such as Real
Madrid, Barcelona, Bayern Munich, Manchester United, Chelsea, Juventus, FC Porto or
SL Benfica. Our study will cover the years 2009 to 2012 with data from 2008 to 2012.
The reminder of this dissertation is structured as follows. Section 2 reviews theliterature and similar studies. Section 3 presents the database used in this study. Section
4 addresses the methodology followed by the presentation of the success variable insection 5. Section 6 discusses the empirical results and section 7 concludes.

3

2. Literature Review
2.1. The European Football Industry
With the changes in European football after the Bosman Case, it is easily observablethat the changes did not happen only in the costs side but also in the revenues side. In
the season of 2000/2001 the aggregate revenue of all clubs in the top divisions
throughout Europe was €6.6 billion. In the 2011/2012 season, this number rose to €19.4
billion 2 meaning an increase of 194% in little more than a decade, representing an
average growth of more than 17% per year. In the same period in the 28 countries ofEuropean Union, according to Eurostat the yearly inflation rate was only two years
above 3%. This tendency is recorded despite the major financial crisis that started after
the 2008 Lehman Brothers bankrupt and only in the last year, the revenues grew 11%.
German Bundesliga, Spanish La liga, Frensh Ligue 1, English Premier League and
Italian Serie A (the 5 major football leagues) contribute with 9,3 Billion whichcorresponds to 48% of the total European market share. Each one of these leagues
reached record levels on revenue which suggests that the football industry still havegrowth potential.
The wage costs of the top five leagues combined reached €6.1 billion in 2011/12
which represents a 8% growth when compared to the 2010/11 season. This means that
despite the European financial crisis, the salaries in football are also still rising whichgoes in favor of the hypothesis of inflationary trend in European football.
However there are good signals coming from football clubs finances. In 2012, forthe first time since UEFA started collecting and analyzing Europe-wide club financial
data the revenue growth was bigger than the wage growth. The same report shows thatthe player’s value on balance sheet represents 48% of the original purchase value,(UEFA 2013)3. Considering that the biggest clubs don’t normally buy players to selllater at a higher price, and most of the aggregate value of football players in Europe isconcentrated in the biggest clubs balance sheet, it is not a surprise.

2
3

All data from Deloitte Annual Review of Football Finance 2013 and Deloitte & Touche Annuel Review of Football Finance 2003
UEFA club benchmarking report: 2013/2014 season4

2.2. Steps towards the football industry sustainability
Even before UEFA, Bundesliga was already giving significant steps towards financial
stability and efficient governance mechanisms. First the clubs are obligated to havemore than 50% of voting power which prevent that very rich foreign persons invest
there, second the league also controls the clubs spending which is a prudent measure
because financial control is necessary. On the downside it can hold back the German
Clubs in terms of European competitions, Szymanski (2010).
Later, UEFA also gave a step forward and issued the Financial Fair Play (FFP)4
Regulation making all clubs competing in UEFA club competitions to be under theirscope. The regulation was characterized by the president of UEFA Michel Platini withthe following words: “These new FFP requirements which have been phased in since2010 represent one of the most ambitious but necessary projects in the world of sports
governance.” (UEFA 2013). The main reasons behind the UEFA financial fair playrules according to UEFA are to: “introduce more discipline and rationality in club
football finances; decrease pressure on salaries and transfer fees and limit inflationary
effect; encourage clubs to compete with(in) their revenues; encourage long-term
investments in the youth sector and infrastructure; protect the long-term viability ofEuropean club football; ensure clubs settle their liabilities on a timely basis5”.
The clubs playing in European competitions need to prepare themselves for the
new UEFA financial fair play rules. The wage costs represent around 66% of total
revenues in the top 5 major leagues making the costs on human capital the main cost on
the football clubs income statements and wages are specified for the break evenrequirement that started to take place in the current season, 2013-14 (UEFA Financial
Fair Play Regulations Art. 58-63).
Costs control is an important UEFA issue because although revenues are growing
European football is facing financial instability. According to Muller, et al (2012) the
reason why UEFA decided to take action and issued the Financial Fair Play Regulation
is to ensure a level of integrity in UEFA competitions limiting the so called “financial
4

Financial fair play rules says that clubs can spend up to €5 million more than they earn per assessment
period (three years). However it can exceed this level to a certain limit (€45 million in 2014/2015) if it isentirely covered by a direct contribution/payment from the club owner(s) or a related party. Sanctions fornot complying can go from a small warning to not be able to register in European competitions.
5

http://www.uefa.org/footballfirst/protectingthegame/financialfairplay/5

doping” by new (very rich) investors and to ensure financial stability in the future ofEuropean football. Barros (2006) stated that football clubs are financially mismanaged
and the main reasons are lack of efficient corporate governance mechanisms as well as
the following of win maximizing strategies and Dimitropoulos (2011) believes that
although the new regulation is a good step towards a brighter future of European
football industry, without the incorporation of efficient monitoring and governancemechanisms in clubs the current financial status of the clubs will not be efficiently
improved by the new UEFA regulation.
Dimitropoulos, (2011) and Dimitropoulos and Tsagkanos, (2012) argued about
the importance of corporate governance mechanisms as tools to achieve a positive
impact in the financial markets and the later study concluded that efficient corporate
governance mechanisms in football clubs can lead to greater levels of profitability, andimprove the clubs solvency which could result in a positive contribution for a better
financial market performance.

2.3. Win Maximization vs. Profit Maximization
Solber and Haugen (2010) found that European football clubs, contrary to North
American clubs, are not profit maximizing. Instead they are win maximizing. Win
maximization clubs often hire more talent than they can afford. So other things being
equal, aggregate profit of win maximizing clubs are lower because costs increase andprofits decrease when more talent is hired. However, with no restrictions acrosscountries in salaries, the most effective instrument to improve performance is to havemore talent. A different strategy with lower talent purchased and lower costs could havein long term a negative impact because bad results in the pitch normally mean reductionof revenues. In order to avoid that trap, football clubs in Europe adopt a moreaggressive strategy in the competition for talent. This strategy more than being the maincause for the costs increase is also the reason for the lack of correlation between
revenues and costs in football clubs.
Késenne (2009) argues that players in a win maximization league are overpaid and thatcan lead to financial problems. Szymanski and Smith (1997) concluded that clubs areable to follow a win maximization strategy because of a failure of the market tocorporate control in the industry that creates obstacles to take overs and acquisitions.

62.4 Football industry: Efficiency and Determinants
Hass (2003) argued that there are teams that are spending too much money in players
and coaches and are not getting both sufficient sport results and revenues. He also
argues that there are teams from bigger towns that should have higher revenues, or inanother words, their social impact is lower than it should be.
Szymanski and Smith (1997) argued that in the English league the amount of skill
a club purchases determines its position in the League. With similar results, Barajas andRodríguez (2010) studied the Spanish league and explained that the production function
in football is linked to the sports entertainment offered in the matches to the audience,
therefore the players are essential elements to develop team production, and that is thereason why they represent the main part of the football clubs expenses. They argued thatthe league outcome is significantly explained by the expenses on players. On the other
hand revenues are explained by both market size/sporting outcomes. There is also a
correlation between total revenues and expenses on players, and almost all debt belongs
to the most competitive clubs.
Mourao (2012) studied the Portuguese league debt and said that the mostcompetitive clubs enter in the so called “race of indebtedness” for three major reasons.
First, clubs face the pressure from the investors and the supporters to win. Second theinflationary wage trend in European football that occurs because of the competition for
top players among the leagues. This inflationary trend has a negative impact to the gamebecause it doesn’t correspond to an increase in player’s quality. The last reason is that
players and managers are valued not only by their talent, but also for their media
potential, which is a big source of revenue but at the same time a reason to spend moremoney. However soccer teams should have better control of their costs since theincrease of debt/indebtedness can lead to restrictions on the players’ wages that willsubsequently lead to lower the team quality in the future. A lot of football clubs do nothave sustainable debts making their market value to deteriorate. In the Portuguese case,it was observed that the debt ratio of Portuguese clubs is positively influenced by ahigher share of wages in the costs structure, by a higher number of points achieved in
the championship and by a larger market area.

7

Hoffmann et al. (2002) studied the socio economic determinants national teams
performance and the results show that factors such as culture, demography, geography
and per capita level are important determinants of success. The impact that the market
area has in a football club success was also studied by Barros (2006) and by Mourao(2008) for Portuguese football. Both studies confirmed that first, the Portuguese league
structure of success is a reflection of its cities with the three most successful teams andevery champions in the league history coming from the two most important cities andsecond, the population size, income per capita and the number of infrastructures are
positively correlated with the ability of achieving sportive success. On the same subject,
Mourao (2010) made a very important contribution, studying the regional determinantsof competitiveness in Europe, using the UEFA Champions League achievements asmeasure of success, and found that although the absolute population of the area where
the club comes from is important for success, the proportion of people living in the area
when compared to the evolving region is more important. It was also pointed out theimportance of urban population and income per capita of the area. This study confirms
the idea that the place where the club come from does matter not only in a regional levelbut also in international level.
Peeters, (2011) studied what shapes the competitive balance of football and foundevidence that a participation in Champions League has a negative effect in the national
leagues competitive balance because of the prize money and broadcast rights revenues
given to the participants. Also, the competitive balance of the Champions League, aslong as any other league, can be enhanced if the prizes and TV rights revenues are moreequalitarian distributed among all clubs, instead of always giving higher shares to thealready richest clubs. Mourao (2012) shares the same opinion and also believes that amore egalitarian distribution of TV rights would result in an improvement of thefinancial sustainability of more clubs.
Lago et al (2004) studied the Italian league and described football as a Virtuous
Circle in which the level of competitiveness of a team depends on the clubs financial
power measured by revenues and this will determine the success that a team has, which
in turn will determine the revenues. It is a never ending cycle that repeats itself. Among
national leagues this cycle is easily observed, since the difference between the top teams
and the others is normally huge. But when the goal is the CL, the prize is only as big as

8the temptation to get it. There are teams taking big risks and in some national leagues
there are teams that find very hard to keep the balance between both European
Competitions and National League. When this happens the results can be very bad inboth competitions.
As we have seen most studies cover national leagues or talk about the socioeconomic determinants of national success. So, the idea is to join and replicate the mainideas in an international level covering the existing gap. Although there consensus
opinions among the authors regarding the importance of the purchasing of talent tosuccess in the short term among national leagues, there is not clear results regarding
long terms, because normally the studies cover one season. On the other hand national
leagues are far less competitive than the CL meaning that talent purchase by itself may
not be enough to succeed in Europe because the competition for talent is huge.

93. Data
We proposed to study European competitions from the year 2009 to the year 2012. We
were able to gather relevant data from 33 major European clubs. Our sample includes
all European football clubs that make public available their Annual report.6
In order to understand if the “virtuous circle” of Lago et al (2004) exists in
European level, first we needed to gather socio-economic data such as city population,
country population, GDP per capita and GDP Variation. More importantly, we alsoneeded the football clubs financial data such as the debt ratio, total liabilities, total
financial debt, medium and long term financial debt, capex, total assets, revenues,
wages, players value, variation of debt, variation of liabilities, depreciations andamortization.

3.1. Data Sources
The financial data was collected from the clubs annual reports. For all the clubs
listed in stock market we took the balance sheets and income statements provided by the
Financial Times website7 – here all data is uniform and with easy access. For the Frenchclubs we took our data from the website of the French League, the “Ligue De Footballprofessionnel”8.
The data needed for our most valuable variable, the success, was taken from ahighly respected soccer website, www.zerozero.pt while the socio-economic data wasgathered from the World Bank data base9 and from Eurostat10.
The coach variable is a dummy variable that assumes 1 if the club coach changes
in a specific year and 0 if the club coach didn’t change. This information was obtainedin Wikipedia11.

6

For the years 2009 and 2011 we have only information for 32 clubs and in a later stage of ourdissertation 2 clubs were excluded for lack of data and sportive results–FC Basel and AIK Fotboll.
7

http://www.ft.com/home/europe

8

www.lfp.fr

9

http://data.worldbank.org/indicator10

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database11

In the wikipédia page of each club, there is a link for managers list. If we decided to put all the links forthis variable, we would have to put more than thirty links, so we are going to put one example.
http://en.wikipedia.org/wiki/List_of_F.C._Porto_managers

10All the data of the clubs outside the Euro Area was presented in their homecurrency, so we had to convert the home currency to Euros. For that we took thehistorical exchange rates from onda.com website.

3.2. Sample Description
Table 1 details the descriptive statistics of our sample. A few important things can beobserved from the results.
Table 1 – Summary Statistics
The sample has annual data from 31 football clubs from 9 different countries between 2008 and 2012 anddoes not include market potential variables – PIB per capita and football clubs home city population.
WAGES_REVENUESt is the ratio between wages and revenues. DEBT_VARIATIONt is the total
financial debt yearly variation in % and LIABILITIES_VARIATIONt is the total liabilities yearlyvariation in %. The values that are not ratios or success are in millions of euros.

First, from 2009 to 2012, the clubs in our sample achieved on average (median)revenues equal to €161.37 million (€138.44 million). The revenues range from anaverage of €13.2 million in the case of Braga to €439.18 million in the case ofBarcelona12. Regarding the wages, during the same period the clubs spent on average(median) is €98.04 million (€93.77 million) ranging from €0.51 million (Trazbonspor)
to €251.43 million (Manchester City).
During the four year period, the average (median) capital expenditures was €12.71
million (€6.05 million). However if we analyze the maximum or minimum value
invested, we observe that in a given season there are teams that make huge investments,

12

In the case of the revenue in a single year, the highest value was attained by Real Madrid in 2012 (€514
million)11

whether to “build” a team or upgrading the club’s infrastructures. During this period theclub that made the highest investment was Bayern Munich in 2011 (€209.03 million)
and the lowest investment was Barcelona (€ -78.52 million) also in 201113.
Regarding the size of the club, the clubs in our sample have on average (median)
total assets equal to €308.68 million (€261.3 million). The biggest and only club in theworld to pass the mark of one billion of euros in assets is Manchester United, and thesmallest club in our sample is Braga. Naturally the biggest financial debt and liabilities
amounts are mostly among the biggest clubs.
As to the capital structure, the average (median) debt ratio is 0,84 (0,79). The
highest leveraged club is the Turkish club Besiktas with a 3,77 debt ratio and the clubwith the lower percentage of liabilities used to finance its assets is Fenerbahce.
Graph 1 represents the same statistics as table 1 but it can give a better insight onwhat some of these statistics means.
Graph 1 – Summary statistics
Graph 1 is a combination of BoxPlot graphics in some of the most important variables between 2009 and2012. Revenues and Wages are in millions of euros.

Looking at the revenues in Graphic 1 we observe that most of the sample seems tofall in the lower part of the graphic meaning that the 25% of the clubs are much richer
than the other 75%.

13

The negative value comes from the “sale” of football players.

12

The wages graph presents a similar shape as the revenues graph. However thedifference between the top 25% clubs and the rest of the clubs (especially the clubs
between the median and the third quartile) is not so big as in revenues, which suggeststhat there are clubs that even with less revenues are trying to close the gap in thecompetition for talent, spending a higher percentage of its revenues in wages than the
top 25%.
Although only 25% of the clubs have higher debt than assets, about 75% of the
clubs in the sample are financing their assets mostly with debt.
Graph 2 presents the ratio between revenues and wages. There is an increase inwages bigger than revenues in 2010 and 2011. In 2012 despite the growth in the Turkish
clubs salaries payments, in the entire sample finally the wages grew less than therevenues. The sample mean in 2012 is under 58%, far from the maximum of 70%
recommended by UEFA. However there are still clubs that spend more money insalaries than they earn in revenues.

Graph 2 - Wages revenues ratio between 2009 and 2012

In 2012 the sum of the revenues of the clubs in our sample was €5.545 billion,
representing 29% of the entire European market which is €19.4€ billion, and 59% of the
top five European leagues combined14. The top 6 success clubs represent 41% of thesample’s revenues and 26% of the sample’s total liabilities (6 clubs represented 19% of
the sample).

14

Deloitte Annual Review of Football Finance 201313

4. The ModelIn this chapter the variables will be explained, the methodology used will be described andthe sample will be defined. As already told in the bibliographic revision, Lago et al (2004)
argued in their study about Italian football about a Virtuous Circle that exists in footballamong the biggest and the smaller clubs. They argue that while the smaller clubs need toinvest on younger and cheaper talent (even here some financial power is needed) toconstruct a competitive team and later collect money with higher revenues or by sellingthese players to bigger teams allowing the cycle to repeat. The bigger clubs with morefinancial resources are able to construct strong teams that lead them to better results andconsequently raise their revenues through merchandising, TV rights sells and match day
tickets sells. To confirm the existence of the virtuous circle among the biggest European
clubs and to understand it, we need to first understand the drivers of financial power,
measured by the revenues (our first dependent variable) needed to construct the competitive
team. We also need to investigate what are the determinants of success and if the successactually increases the revenues. This is the primal objective of the study and to meet theobjectives it was fundamental to construct and define a variable “Success” (our second
dependent variable).

We use panel data regressions and in all our regressions we report standard errorsthat are robust to heteroskedasticity and are clustered at the team level, covering thestudy period between 2009 and 2012.

4.1. Determinants of Revenues Hypothesis
This section sets out the empirical methodology to analyze if there is any evidence that
Virtuous Circle exists. The determinants of financial power will fit in two categories:
Market Area (Mourão 2008 and Mourão 2010), Success (Lago et al 2004).
Financial Powerit = f (Market Areait, Successit,)
The club’s revenues are used as proxy for financial power (dependent variable)
since the clubs that are normally considered the richest in the world of football arealways the clubs with higher revenues.
As exogenous variable that proxies for regional economic development we use thecity population of each club divided by the number of clubs in the city that played in the
CL during the period analyzed and the country GDP per capita of each club. Finally the14

(international) success of a team will be measured according to a new variable that takes
into account how each team performed/advanced in the European competitions in eachof the years analyzed 15 . Given the exponential characteristics of this variable thelogarithmic of the variable “success” will also be, alternatively used.

4.2. Determinants of Success Hypothesis
In order to identify the determinants of success, several variables grouped according to
the Competitiveness of a team (Lago et al 2004), Coach (Haas 2003), Size (UEFA2010; Oberstone 2009; Mourão 2012) and Leverage will be used as exogenous
variables:
Successit = f (Competitive teamit, Change in coachit, Sizeit, Debtit)
Our measure of success (or its logarithmic) will be used as dependent variable. As
proxy for the team competitiveness we are going to use wages and the ratio wages overrevenues.
Wages are the best proxy for player’s talent. In a perfect competitive industry, eachplayer is expected to receive his marginal revenue product in revenues. The common
sense is that you get in performance for what you pay (Szymanski and Smith 1997).
As proxy for change in coach, we are going to use a dummy variable that assumes
number 1 when there is a change in coach during or in the pre-season or 0 otherwise. A
change in coach can happen due bad results or less likely because the coach wants to go
somewhere else. That change can affect the success of a team for both ways, andwithout a good coach it is not likely that any team would have a good season.
As proxy for size we will use total assets of the clubs. The biggest clubs are theclubs that have made higher investment over the time not only in players but ininfrastructures. Kern, et al (2012) argued that the net transfer activity is a valuable input
for sportive performance as shows the club activities in the transfer market or in otherwords, mainly the club investment in talent. Given that, we are also going to use as aproxy for the net transfer activity the total Capital Expenditures.

15

The construction of the variable success will be explained in the next Chapter

15

Finally, we will use as proxy for leverage the total liabilities of each club as well as
the change on total liabilities. The total liabilities of a club can influence the success ofa team because football clubs may incur in debt in an attempt for success or to improvethe club’s infrastructures.

16

5. European Competitions and the Construction of the Success
Variable
5.1. European Elite play in the CL
It is widely accepted that the UEFA Champions League (CL) is the most importantfootball club competition in the World. It is organized every year since 1956 and since
its first edition until now it has been significantly modified in terms of number of clubsthat play in the competition, structure and even the competition name as changed.
In the beginning, only each national league champion could play in CL, leaving
strong teams, even potential winners, in the other European competitions. So, theEuropean competitions were more leveled in terms of quality and difficulty than they
are today.
Nowadays UEFA has a country league ranking defined according to the country
clubs success in European competitions. That ranking determines how many clubs fromeach country can play in CL and in European Competitions. A higher ranked nationalcountry puts more clubs in the European competitions and in CL than a lower ranked
country. For example, national leagues of the top 3 countries can take up to 4 teams to
the CL. The Portuguese league is currently in 4th position meaning that 3 Portuguese
teams have an opportunity to play in the CL. In the worst ranked leagues not even thenational champions have direct entry guaranteed in European Competitions16.
There were changes along the way and the CL is not for the European leagues
winners anymore, but for the elite. However, one thing remains the same: only the mostsuccessful and competitive clubs of each European league play in the European
Competitions.

5.2. The hardest club competition in the World
The group phase of the CL starts in September and the Final is in May, so it lasts for theentire season. The competition starts with 32 clubs forming 8 groups with 4 teams each.
The group stage has 6 games and each team is awarded by UEFA with 3 points per
victory and 1 point per draw. The 2 teams with the most points qualify to the playoffs,
the 3rd team is relegated to the Europa League (EL) and the last team is eliminated from16

www.uefa.com

17

European competitions. The three playoffs rounds (eighth-finals 17 , quarter-finals andsemi-finals) are 2 games each and the final is only 1 game in a neutral pre-definedplace. In the competition structure lays one of the reasons why it is so hard to win: it is
not a competition based on regularity.
Since the competition changed its name from Champion Clubs Cup to Champions
League in 1992 no club won the competition two times in a row. It is an extremely hardcompetition to win and, when comparing to national leagues, it is much more difficult
to predict a winner because, every year, there are several very strong candidates to thefinal victory.
In 58 years of history, 22 clubs won the CL (or the Champions Club Cup) and,since 1992, 13 clubs won the CL. Table 2 presents the 12 most successful football clubs
in CL (or the Champions Clubs Cup) history in terms of final victories.
Table 2 – Historical most successful teams

Source: http://www.uefa.com/uefachampionsleague/history/index.html

Besides the historical Nottingham Forest that nowadays does not even play in the
English Premier League, all the clubs in Table 2 are present in our study.

17

Also known as “Round of sixteen”, “Last sixteen” or “Octo finals” (Wikipedia)

18

5.3. The Construction of the Success Variable
To measure the success of our clubs, we constructed a “Success” variable based on aranking system. The ranking assumes that the CL is the “1st division” of European
Football, the EL as the “2nd division” and the achievements of each club in thesecompetitions will determine their ranking i.e. their success. The 8 (3rd place of eachgroup) teams that were relegated in the group stage from the CL to the EL go directly tothe last 32 EL stage (the other 24 teams come from the EL group stage) and have a goodchance of winning the competition (In the last six seasons, seven of the twelve EL
finalists were relegated from CL). However, the relegation happens in December andany team can start the season with bad performances, so is a fair assumption that thisrelegation is also a second opportunity for success. Thus we have decided that: being in
the group stage of CL has the same sportive importance as reaching the semifinal of EL;
reaching the CL eighth-finals equals reaching the final of EL; reaching the CL quarterfinals is equivalent to be the winner of EL.
Our final success ranking is the sum of two variables: A Fixed Score and aflexible Bonus Score which can be seen as follows:
Fixed Score + Bonus Score for win or draw = Total Score (Success Ranking)5.3.1. Fixed Score and Bonus Score
Both fixed and bonus scores are presented in Table 3. Fixed score points are awarded
depending on each club final classification (or stage reached) in the European
competitions. The bonus score points exists to guarantee the continuity in the Success
Ranking. The scores are based on an exponential mode because it takes a lot more for aclub to move from the semi-final to the final than to move from the eight-finals to thequarter-finals.

19

Table 3 – Success Ranking Construction

The winner of the CL will get 2,981 fixed points while the finalist will get afixed score of 1,096.6 points and so on. However, two teams can reach the same stageof the competition with different performances in all round/group stages. The bonus will
reward the teams that had a better performance (more victories and draws) throughout
the competition.
So, in terms of bonus points each victory is worth the total bonus points of thestage where the victory occurred divided by the number of possible matches in thatstage. For example, the semi-final of the CL is played over two games, so the bonus
score for a victory is 346.6 (693.2 / 2 = 346.6). As the CL group stage is six matches,
the bonus score for a victory is the total bonus score divided by six (34.51 / 6 = 5.75). A
draw in the playoffs worth half the points of a victory and in the group stage worth one
third of the points awarded to a victory, reflecting the different characteristics between
the group stage and the playoffs while a defeat in any stage is awarded 0 bonus points.
The final bonus score in one season is the sum of the bonus points earned in eachdifferent stage of the competitions.
As previously mentioned, the exponential element in our success variable (thatwe believe to better translate the success in European competitions) also justifies thelogarithmic mathematical application as proxy for the success of each club. To a better
understand of our measure three examples are presented in Appendix 1.

20

6. Discussion & Results
The upcoming section is divided into 2 subsections, with the aim of examining the
Virtuous Circle in European Competitions. The first section focuses on the determinantsof the financial power required to build a competitive team and the second stage isaimed to examine the determinants of success.

6.1. Determinants of Revenues
In Table 4 we present the estimated coefficients of the fixed effect panel regression of
our first model. The dependent variable is the club revenues and the exogenous
variables are: the GDP per capita, the city population divided by the number of theteams playing in CL and the log of our success variable. In Models I, II and III we
regress each variable individually against the revenues. Model IV reports the results ofregressing revenues on market area potential variables. In Model V we report the resultsof regressing revenues on all three variables.

In Models III, IV and V we regress each variable individually against the revenues.
Table 4 – Determinants of Revenues

The results are not surprising. First all coefficients associated to the exogenous
variables are statistically significant. Even when all variables are used in the somemodel the significance of the coefficients associated to all variables don’t change whichsuggest that all variables together explained the club revenues. These results are
consistent with the results of other authors, such as Mourão (2010), and suggest that thegeographic location of football club does matter.
The results also show that the success in European competitions also helps to
explain the club revenues even without considered the market area potential.

216.1.1. The Real Impact of Success in Revenues
According to the previous Model V, for each additional point of our success(logarithmic) variable the club earned on average more €14.4milllion in revenues. Table
5 relates the log variable for each CL stage with the actual UEFA prize money and withthe model prediction for revenue increase by reaching each different stage in thecompetition.
Table 5 – Revenues Increase Prediction vs UEFA Prize Money

Table 5 shows us that part of the revenue growth is directly related to the UEFA
prize money which is consistent with the fact that although the UEFA prize money is
not the only revenue linking with the European competition success, is representative.
Reaching higher stages of the competition also increases revenues from match day
tickets, TV rights, marketing, merchandising and the very important asset appreciation
which allows poorer teams to restart the Virtuous Circle.
For example, Bayern Munich and Real Madrid, the winners of CL in 2013 and2014 won from prize money and television rights €55M and €57M respectively, close towhat the model predicts for a CL winner. If we would consider the match day tickets
and merchandising the revenue increase would be even bigger. Asset appreciation is not
as important for these teams, because they are “buyers”, not “sellers” as for example FC
Porto or SL Benfica.
Chelsea in 2014, a “buyer” club, reached the semi-final and earned from TV
rights and prize money €43.3 million. The model says that during 2009 and 2012 asemi-finalist would earn €44 million and considering that football clubs revenues havebeen increasing, it seems very accurate.

22

6.2. Determinants of Success
6.2.1. Results with the Success Variable
In Tables 6 and 7 we report the estimated coefficients of the fixed effect panel
regression of our second model. The dependent variable is our success variable and theexogenous variables are several financial statement variables and one non-financial
variable (coach dummy variable).
In Table 6, Models I and II report the results of the fixed effect panel regressionof our second model using as exogenous variables either the total wages or the ratio
wages to revenues. Table 7 shows the inclusion of other financial and non-financial
variables in order to analyse the incremental explanatory of those variables (Models III,
IV, V, VI VII and VIII). Finally on Models IX, X and XI, we took off the wages andwages/revenues in order to understand the explanatory power of the other variables
when “left alone”.
Table 6 – Determinants of Success 1

Table 6 shows that without the other exogenous variables, both the total wages
and the ratio wages/revenues are statistically insignificant.
Table 7 shows that even with the inclusion of the others financial and nonfinancial variables, the coefficients associated to wages and to wages/revenues ratio arestill statically insignificant. We can also assert from Table 7 that the European
competitions success can be partly explained by the previous year capital expenditures
and the total assets. Oberstone (2009) also suggested that success is associated to thetotal assets of the club. Nevertheless, the explanatory power of these exogenous
variables is relatively low.

23

Table 7 – Determinants of Success 2

However, Table 7 also shows that capital expenditures in a year damage theprospect of success in that same year. This result suggests that the club’s investment ininfrastructures and mainly in new players does not have an immediate impact on the
success. The success only comes in the following year. We may speculate that theseresults are due to the fact that every year in the European competitions (especially CL)
there are very good teams with players that are already together for a while and are fully
adapted to the team. So, an investment in new players can bring problems of adaptation
to the new colleges, to the city or to the style that the team plays. The study of Frick(2011) may also help explaining this phenomenon. The author finds evidence that theplayers increase its effort and performance over the years of their contract, i.e., as thecontract approaches its end.

6.2.2. Results with the Logarithmic of the Success Variable
The Tables 8 and shows the estimated coefficients of the fixed effect panel regression of
our second model but now the dependent variable is the logarithmic of our successvariable.
In Table 8, Models I and II report the results of the fixed effect panel regression of
our second model using as exogenous variables either the total wages or the ratio wages
to revenues. Then we include the other financial and non-financial variables in order toanalyse the incremental explanatory of those variables (Table 9 - Models III, IV, V, VI

24

VII and VIII). Finally in order to better understand the explanatory power of thesefinancial and non-financial variables, we took off the wages and wages/revenues (Table
9 - Models IX, X and XI).
Table 8 – Log Success 1

Table 8 shows that while the total wages are statistically insignificant with a pvalue of 13% (Model I), the ratio wages to revenues are statistically significant andpresent a negative relation with success. These results together suggest that paying
higher wages (more talent) increases the chance of success, however if the teamstruggles to pay high wages, since they are not proportional to their revenues those highsalaries have a negative effect in the success of the team.
Table 9 – Log Success 2

Table 9, confirms that the coefficients associated to wages are statisticallysignificant when other variables are included (Models III, IV and V). These results are
consistent with Barajas and Rodríguez (2010) who detected a positive relation between
wages and success.

25

The coefficient associated with the current year capital expenditures are negative
reinforcing the idea discussed in section 6.2.1 that football players perform better after
the first year in the club. It is also important to notice that the coefficients associated tothe size of the club (total assets) are insignificant in all regressions.
The coefficients associated to a change in debt (or total liabilities) are negativeand statistically significant which suggest that an increase in debt decreases theprobability of success.
Finally, our results suggest also suggest that a change in the team coach decreases
the probability of international success.

26

7. Conclusions
When studying the financial situation of the major European clubs, it is necessary to be
conscious about the limitations derived from the different languages and the low qualityof the information that some financial statements provide.
Despite the existing literature, studies focused on the connection between main
financial issues of the football industry on international level are still rare ornonexistent.
The present dissertation tries to fill in this gap, by exploring empirically the Lagoet al (2004) Virtuous Circle on international level. This study shows that club’s
revenues are explained by the market size, the market’s wealth and the sporting
outcome, confirming the results of other authors such as Mourão (2010) and Barajas
and Rodríguez (2010).
Consistently to the presented bibliography, our results show that the amount ofwages paid Barajas and Rodríguez (2010), the total assets Oberstone (2009) andprevious year capital expenditures (capex t-1) are positively correlated with sporting
success. However, the present year capital expenditures (capex t) are negatively
correlated with success suggesting that the players perform worst in the first year of
their contract due to integration problems or personal financial reasons (Frick 2011) andincreasing productivity as their contract nears its end. There are several reasons for acoach change, some of them passing through the past success or failure. However, ourresults show that the coach change itself doesn’t help to explain sporting success.
Although wages are the biggest expense of football clubs, our results show thatthey are also the most important financial variable that helps to explain success, making
it the most important financial variable in the industry. However our results also suggestthat if the wages paid by club are not supported by revenues the effect on success isnegative.
Mourão (2012) pointed out that top clubs resort on financial instruments to grant
and maintain their top players, even if provided by debt. Nevertheless our results showthat increases of financial debt or total liabilities are negatively correlated with success.
So, we believe that the football clubs that are incurring into unsustainable debt in theattempt of achieving success should be aware that this is a very risky strategy, with areal failure possibility (as our results show) that can result in financial distress.

27

The financial situation of the clubs in our sample is actually improving and 40%
have revenues higher than 200 million, meaning that there are some clubs with financial
conditions able to construct a team with good possibilities to win the competition oncein a while. Moreover 2012 was a good financial year in football as the value of the total
assets grew more than the liabilities and the wages grew less than the revenues.
Our results clearly show that the clubs that are revenue generators are the clubsthat have more success. This fact is very damaging for the competitiveness of European
Football, so, the introduction of a “salary cap”, a more equalitarian TV rights
distribution or the obligation to have more players formed in the clubs playing, aremeasures that would give the smaller teams a real possibility to compete against therichest teams without compromising neither the sustainability of the industry nor theoverall quality of the match.
While there is an ongoing debate between football bosses and fans about thedirection that football is going, further studies are needed to understand the real
economic impact that outside funding has in football and in society. Is it morally
correct to assume that profits coming from natural resources are being used to power up
millionaire teams (as Manchester City, PSG or Zenit), disregarding the welfare of thecommunities? Moreover, we must not forget that in the football industry almost all of its
revenues are shared within a very limited set of people, as “Football Companies” andinvestment funds in the business don’t have many employees.
Football clubs are treated more like business companies and although it makes the
football clubs more efficient, it can also make them to lose their connection to the fans.
The future of the football sport as the people’s entertainment is at risk and maybe evenits natural beauty as a game may not be enough to stop it.

28

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Mourao, P. (2012). The indebtedness of Portuguese soccer teams looking for
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http://www.uefa.org/footballfirst/protectingthegame/financialfairplay/
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Appendix

Appendix 1 – Total Score - Practical Examples APPENDIX
Example 1: Arsenal played the CL in 2010. During the group stage had 4 wins, 1
draw and moved to the next phase with 13 UEFA points. According to the total bonus
point to this stage Arsenal was rewarded with 24so in the group stage Arsenal wasawarded 24.9 (4 times 5.75 plus 5.73/3 for one draw) bonus points. In the last eighthfinals Arsenal won 1 game and lost the other and so was rewarded with 46.9 additional
bonus points. Because of goal difference Arsenal managed to move to the next stage. In
the quarter-finals Arsenal draw 1 match, lost the other and was eliminated. The draw
gave Arsenal 63.8 bonus and the elimination in the quarter-finals gave Arsenal a total of
148.4 fixed points. So, the total points awarded to Arsenal in 2010 season was equal to284 points (148.4+24.9+46.9+63.8).
Example 2: Braga during the 2011 season is an example for the exception
mentioned in Table 3 as was relegated from CL to EL and so win two times the fixed
points in one season. Braga in 2011 was relegated from CL to EL and lost the final of
EL against Porto. So, Braga was awarded 20.1 fixed points for having reached the CL
group stage plus 54.6 fixed points for having reached the final of EL. In terms of bonus
points, Braga was also awarded from points earned in the CL group stage plus the bonus
points from the different EL stages he played. In total Braga was awarded with 44.9
bonus points for a total of 119.6 points.
Example 3: Chelsea in 2008 lost the final of the CL in penalties (the result was adraw at the end of the game) against Manchester United. The bonus point of the final
was the same for both teams, 942.2, but while Manchester United won the winner prizeof 2,981 fixed points, Chelsea won only 1096.6 fixed points for being the defeated
finalist. Both teams earned also bonus points for the previous stages of the competition.
In the end Manchester United ended the season with 4799.1 total points while Chelsea
earned 2779.6 total points.

32

Appendix 2 – The Sample Clubs
This table lists the names, the home country and the ranking according to the Success
Variable of the 31 football clubs in our final sample.

33

Appendix 3 – Variables Formula34

Attachments

Attachment 1 – The Virtuous Circle of the Leading Clubs

35

Attachment 2 – The Virtuous Circle of the Small Clubs

36