Academic journal article International Journal of Sport Finance

The Effect of a Sports Institution's Legal Structure on Sponsorship Income: The Case of Amateur Equestrian Sports in Germany

Academic journal article International Journal of Sport Finance

The Effect of a Sports Institution's Legal Structure on Sponsorship Income: The Case of Amateur Equestrian Sports in Germany

Article excerpt

Abstract

Choosing the legal structure of a sports institution is one of the key decisions that sports managers must make. Using platform theory and property rights theory, this paper shows that the choice of legal structure influences the revenue composition of sports institutions. We hypothesized that member associations should receive higher sponsorship revenues than private firms because their legal structure offers better protection against hold-up for sponsors and also for customers/members, which in turn leads to increased attention for the sponsor. We tested this prediction using quantitative data from a nationwide online survey of equestrian sports institutions in Germany. In 2009, n=574 private firms and n=1,165 member associations completed the same questionnaire. Regression analyses were run to determine whether the legal structure has an impact on sponsorship income. The results confirmed the hypothesis that the legal structure has a significant impact on sponsorship income.

Keywords: sponsorship, property rights, platform theory, sport club, private firm

Introduction

The increasing success of English clubs in European professional football is currently driving a public discussion in Germany about the competitiveness of its local clubs (Franck, 2010b). Experts have often cited the legal structure of the clubs as a core reason for their poor game performance (Kicker, 2010). German football clubs are restricted by the 50+1 directive, which ensures that the clubs are organized as, or at least dominated by, member associations. Member associations are characterized by their own legal personality, democratic structure, and non-profit status. In contrast, the English clubs are free to select their own legal structures and, as a result, mainly choose to act as private firms. Private firms are defined as profit-oriented institutions that fit the classic model of capitalistic, privately owned firms. Judging by the success of English clubs in recent years, private firms appear to be superior to member associations. However, a more sophisticated analysis is necessary.

In previous economic research, there was no agreement among scholars regarding the influence of the legal structure on the performance of a firm. For example, while neither Demsetz and Villalonga (2001) nor Himmelberg, Hubbard, and Palia (1999) could find an effect in their studies, Karpoff(2001) and Frick (2004) demonstrated that effects are measurable when a homogeneous dataset is used. However, none of the legal structures seem to be superior in every respect. The choice of a legal structure is determined by trade-offs, as each legal structure brings along certain advantages and disadvantages. Demsetz and Lehn (1985) tried to identify the forces that determine the choice for a specific legal structure. Hansmann (1986) showed advantages with regard to the perception of different legal structures. For example, profit-oriented private firms are considered to be more efficient than non-profit organizations. In addition, they have easier access to the capital markets. In contrast, non-profit organizations enjoy higher credibility than profit-oriented institutions.

With regard to sports management, Dilger (2009) evaluated the competitiveness of member associations in professional sports and showed that they do not necessarily backdrop when compared with private firms. Dietl and Weingärtner (2011) reported that the legal structure of professional sports institutions impacts their revenue composition. Professional sports clubs primarily derive their earnings from four different sources: match day/tickets, merchandise, broadcasts, and sponsorships (Deloitte, 2010). The influence of the legal structure on the varying proportions of the institution's revenue sources can be seen by comparing the leading English club, Manchester United, which is organized as a profit-oriented private firm, with the German market leader FC Bayern Munich, which is structured as a non-profit member association. …

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