Premier League Market Efficiency: An Empirical Study of Revenue Incentives and Capital Allocation

Abstract

European football has seen explosive growth and globalization, beginning in the 1990s. Starting with the landmark Bosman ruling in the 1990s, the player’s labor market was liberalized and a steady period of explosive growth of both club revenues, and player transfer fees, followed. In England, massive external capital injections have been largely skewed towards the top tier of Premier League; according to Deloitte (2017), the revenue ratio between the top and bottom clubs is currently 4:1. This study examines club behavior as market sellers of a product, examining club financial performance and club match performance between the 2007/08 season and 2014/15 season, using yearly club financial reports from The Guardian, and yearly match performance data from the RSSSF. Raw data analysis first highlights the growing disparity in all three segments of revenue (Matchday, Broadcast, and Other) between the top-6 clubs and the mid and bottom tiers. Furthermore, this study shows that segmented revenues differ in responsiveness to match performance; Broadcast revenues show significant responsiveness to better match performance, while Matchday revenue results show a dichotomy in financial incentives for top-tier and bottom-tier clubs to invest in their match performance. The study also examines club capital allocation, and finds that clubs strongly benefit from debt-financed external investor takeovers, but ineffiently and inaccurately invest this money in the transfer market. Transfer Spend regressions indicate that transfers are highly volatile in terms of return, and largely do not significantly affect performance, indicating that clubs are incentivized to re-allocate capital in alternative sources, such as sponsorship revenue growth or youth development.