Academic journal article National Institute Economic Review

Transfer Spending in the English Premier League: The Haves and the Have Nots

Academic journal article National Institute Economic Review

Transfer Spending in the English Premier League: The Haves and the Have Nots

Article excerpt

Transfer spending among English Premier League clubs has increased drastically since the inception of the league, often funded by extremely wealthy owners who began purchasing majority stakes in clubs. Using data from the Deloitte Annual Review of Football Finance, we allow for different tiers of football clubs representing the haves and the have nots as well as a comparison between the first and second decades of the Premier League. Our finding that heightened spending has improved on-field performance only at the expense of hurting profitability is in line with win maximisation surmounting profit maximisation in today's Premier League.

Keywords: English football; transfer spending; profit maximisation

JEL Classification: G15

1. Introduction

Although English Premier League clubs have long spent more in transfer fees than they received from selling players, the level of this spending has sharply increased in recent years as has its concentration amongst a sub-set of particularly wealthy clubs. This reflects a continuing decline in competitive balance in English football, with Lee and Fort (2012) identifying a breakpoint after the 1994/5 season. In turn, Feddersen and Maennig (2008, p. 163) show that the English Premier League actually had the lowest competitive balance among the five biggest European football leagues from 1999-2000 to 2006-7, after having featured average to higher than average competitiveness over the 1980s and 1990s. Borooah and Mangan (2012) argue that, while competition for the top honours remains fierce in the Premier League, this is essentially relevant only to the top quartile of the league. Lower tier teams, by contrast, cannot realistically hope to compete with the top teams and instead focus simply on avoiding relegation. In the analysis below we consider how such a distinction between top tier and lower tier teams is not only reflected in differential transfer spending but also in terms of its relationship with club performance both on and off the pitch. Our empirical work suggests that heightened spending has improved on-field performance only at the expense of hurting profitability.

Figures 1 and 2 illustrate some striking disparities in the trends in net transfer spending, which is defined as the amount spent on player registrations minus the profit from sale of players. (1) Figure 1 shows how net transfer spending has on average been more than twice as high for the top teams as for the bottom teams in the English Premier League. These clubs have also enjoyed more than twice as much revenue but without any apparent accompanying profit advantage. Figure 2 depicts how transfer spending, as well as revenue and wage costs, more than doubled between the first ten years of the league (1992/3-2001/2) and the subsequent years (2002/3-2011/12). (2) The more than doubling of net transfer spending after the 2002-3 season occurs in conjunction with the growing influx of extremely wealthy club owners. An early, and perhaps most notable, major entrant was Roman Abramovich, who took over Chelsea FC in July 2003. He has been followed by even higher net worth individuals, with the wealthiest of them all being Mansour bin Zayed Al Nahyan who took over Manchester City in September 2008 and enjoys an estimated net worth of over $32 billion (see table 1 for more details). Although league revenues have continued to rise, increasing 7 per cent between the 2011/12 and 2012/13 seasons, net losses mounted to reach 316 million [pounds sterling]--with top finishers Chelsea, Liverpool and Manchester City all losing more than 50 million [pounds sterling] apiece during 2012/13 (Deloitte Annual Review of Football Finance, 2014).

The apparent tendency of top Premier League teams to spend so much on acquiring the highest quality players available seemingly points towards win maximisation (or, more generally, utility maximisation--Sloane, 1971) as opposed to profit maximisation. …

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