Sport Management Review 21 (2018) 563–581

Contents lists available at ScienceDirect

Sport Management Review

journal homepage: www.elsevier.com/locate/smr

Competing by investments or efficiency? Exploring financial

and sporting efficiency of club ownership structures in
European football
Marc Rohde* , Christoph Breuer
German Sport University Cologne, Germany

A R T I C L E I N F O A B S T R A C T

Article history:
Received 27 March 2017 Professional European football clubs have been hypothesized to maximize sporting or
Received in revised form 14 January 2018 financial objectives. The authors analyze the impact of various ownership structures on the
Accepted 17 January 2018 realized management efficiency in maximizing profitability and national sporting success.
Available online 1 February 2018 Therefore, they apply the time-varying stochastic frontier model by Battese & Coelli (1995)
to an unbalanced panel from England and France between 2006 and 2012. French
Keywords: professional football is characterized by a shift towards private investors. Results show that
Football club management clubs majority-owned by private investors are less efficient than other clubs in French Ligue
Stochastic frontier analysis
1. In English professional football, the majority of takeovers is pursued by foreign investors.
Team investment
Although previous researchers have shown that foreign investors increase financial
Management efficiency
Private investors resources and team investments, the authors demonstrate that foreign investors reduce
Europe both financial and sporting efficiency. The analysis of survival and financial team
efficiencies of club ownership structures indicates that clubs tend to compete by
investments rather than efficiency.
© 2018 Sport Management Association of Australia and New Zealand. Published by Elsevier
Ltd. All rights reserved.

1. Introduction

The European football industry faces several key trends contrarily impacting managerial efficiency. According to UEFA’s
“European Club Footballing Landscape 2014” (UEFA, 2014), Europe’s top division football clubs generated s14.1bn revenues
with wages of s9.1bn in the 2011/12 season. Thus, on average, 65% of revenues have been spent on salaries, wages, signing
bonuses, employee benefits and social insurance payments. Wages of European football clubs have grown from s4.9bn in
2006 to s9.1bn in 2012 (+11.0%), while revenues have only grown from s9.0bn to s14.1bn in the same time (+7.7%). A key
reason for these developments has been the entry of external investors injecting additional cash into the industry and driving
the professionalization of club management (Franck, 2014; Madden, 2015). UEFA has introduced “Financial Fair Play” rules
favoring efficient and long-term club investments and stable financial accounts (Franck, 2014; Müller, Lammert, &
Hovemann, 2012; Peeters & Szymanski, 2014). Given these new rules which have been implemented in 2011 and have taken
full effect since the 2013/2014 season, club managers need additional guidance in how to make best use of given resources
(Barros & Leach, 2006; Dawson, Dobson, & Gerrard, 2000; Frick & Simmons, 2008). Relative importance is expected to shift
from maximizing investments to maximizing efficiency in the usage of resources.

* Corresponding author.
E-mail addresses: [email protected] (M. Rohde), [email protected] (C. Breuer).

https://doi.org/10.1016/j.smr.2018.01.001
1441-3523/© 2018 Sport Management Association of Australia and New Zealand. Published by Elsevier Ltd. All rights reserved.
564 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581

These trends raise the question how an efficient club management really operates. Do managers overinvest money from
external investors? And, does the ownership by (foreign) private majority investors affect efficiency?
We use an unbalanced panel comprising seven seasons from 2006 to 20121 and 32 European football clubs from the 1st
divisions in England and France. We utilize a stochastic frontier method developed by Battese and Coelli (1995), which allows
simultaneous determination of the frontier and inefficiency function.2 The effect of (foreign) private majority investors on
the efficiency of converting the fundamental resources into operating profit and league points is analyzed. This requires a
few definitions. First, we differentiate between various club ownership structures. Private companies are characterized by
owners which both exert control over the club and bear the financial impact.3 Foreign investors owning private companies
are analyzed separately due to their typically superior spending power and arguably different objective functions (Kuper,
2009; Nauright & Ramfjord, 2010). Second, we introduce the notion of managerial efficiency. In the context of sports clubs,
efficiency is typically used to evaluate the process of converting team inputs (e.g., player talent) into team outputs (e.g.,
sporting success, financial success). Thereby, we distinguish between sporting efficiency, that is, the conversion of team
inputs into national league success, and financial efficiency
the conversion of team inputs into operating profits. We
choose an output orientation—that is, efficiency will be evaluated based on the distance between observed and maximum
possible output with given inputs. By managerial efficiency, we will refer to the conversion of team inputs into team outputs
by impacting variables under the control of club managers. Due to the different incentive structures, varying degrees of
resources, and the willingness to inject these resources into the club by the introduced ownerships models, we may expect
different managerial efficiencies.
Our methods approach makes use of the special characteristics of the Battese and Coelli (1995) model for panel data. The
frontier function models the conversion of team inputs into team outputs. The methodological choice of club resources as
independent variables and of operating profits and national league success as dependent variables of the frontier functions is
based on the standard profit and win maximization literature. The inefficiency function models the inefficiency effects as
function of firm-specific variables and time. The application of club ownership variables to the inefficiency function is a novel
approach.
There are several reasons why the impact of club ownership models on the efficiency of club’s maximization of profits and
sporting success is of interest. First, from a managerial point of view, club managers are interested in the most efficient
ownership models and in corresponding incentives. This importance may be strengthened since the introduction of the
UEFA Financial Fair Play. We find that Ligue 1 clubs owned by private investors are less efficient than those which are not.
Second, from a regulatory point of view the UEFA is interested in maintaining the integrity and competitive balance of the
game. We empirically show that foreign private majority investors tend to decrease efficiency. This may have important
implications related to the introduction of the UEFA Financial Fair Play. Previous researchers have shown that foreign private
majority investors seem to increase team investments (Rohde & Breuer, 2016b). The UEFA Financial Fair Play, however, is
argued to limit overinvestments and incentivize efficient management (Franck, 2014; Madden, 2015). We will provide the
UEFA with additional insights into the objective functions and efficiencies of investors, and thus support future regulatory
initiatives. While we identify clear patterns among domestic investors, profit-generating foreign investors, and loss-
generating foreign investors, we also find some heterogeneity which is particularly prevalent among foreign investors. This
heterogeneity should be taken into consideration by the UEFA when designing potential future regulatory adjustments.
Third, from an owner perspective, potential investors may be guided in their choice of the investment target and the league
to operate in. Some clubs may primarily aim for sporting success by maximizing investments, while others may primarily
aim to generate a profit based on efficient management. Finally, we shed light on the role of ownership structures in the pre-
UEFA Financial Fair Play era. We recommend future sports economics research to analyze whether the Financial Fair Play
effectively encourages efficient management and influences the attractiveness of various ownership models. If the role of
efficient management is indeed gaining in importance relative to absolute investments, we may expect to see a change in the
role of foreign private majority investors
be it a crowding-out effect to certain investors or a potential change in ownership
structures.

2. Literature review

The literature review is structured as follows: Firstly, we review the production process of professional football clubs. This
includes the profit and win maximization literature on the output side, and resources and investments on the input side. We
differentiate between unconstrained resource usage typically assumed in professional sports, and constrained resource

1
Seasons spanning two years (e.g., 2011/12) will be referred to by the later year (e.g., 2012).
2
Managerial efficiency and inefficiency are inter-related concepts that will be used throughout this study depending on the context of its use. The
technical efficiency is defined as exponential function of the negative inefficiency value u: TE = e
u. Generally, we will show clubs’ efficiency scores rather
than inefficiency values due to its more intuitive interpretation. The stochastic frontier methodology applied later in this paper does explain managerial
inefficiency.
3
In England, public corporations listed at the stock market are typically registered as “public limited company” (PLC), while private companies are usually
registered as “private limited company” (Ltd.). In France, most clubs are registered as “Société Anonyme Sportive Professionnelle” (SASP) or “Société
Anonyme à Objet Sportif” (SAOS). Some of them are still controlled by member associations, while most clubs have transferred the majority of shares to
private owners.
 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581 565

usage as motivated by limited resources and regulatory constraints due to the UEFA Financial Fair Play. Secondly, we review
the influence of ownership models on the performance and efficiency of professional football clubs. We focus on domestic
and foreign private investments, and summarize key literature from both the financial management and sports management
literature. We end the section with a short overview of ownership models in England and France.

2.1. The production process of professional football clubs

2.1.1. Profit and win maximization

Managers of professional sports clubs need to cope with a few peculiarities of the production process of sports clubs. The
role of (football) managers can be summarized as taking strategic decisions to convert a set of inputs most efficiently into
financial and sporting outputs. Researchers traditionally either assume profit maximization (Fort & Quirk 1995; Neale, 1964;
Vrooman, 1995) or win maximization (Késenne, 1996; Quirk & El Hodiri, 1974; Sloane, 1971) as objective function on behalf of
teams in national leagues. Neale (1964) was the first to implicitly assume profit maximization on behalf of professional
sports teams. El-Hodiri and Quirk (1971) formalized Neale’s (1964) discussion in a general economic model of a sports league
with profit maximizing owners. He builds on a contest success function to model competition and interaction among clubs.
Vrooman (1995) develops a general theory of professional sports leagues in the context of the US Major Leagues.
Contrary to the profit maximization assumption, there is a research stream assuming utility or win maximization. As
noted by Fort (2015), the formal concept of utility maximization was simultaneously introduced by Sloane (1971) and Quirk
and El Hodiri (1974). Sloane’s (1971) foundational paper on utility maximization in English football is based on the idea that
the separation of ownership and control might allow managers to pursue utility maximization subject to a minimum after-
tax profit constraint. He formulated utility as a function of sporting success, attendance, health of the league,4 and an
acceptable profit. Further, he was the first to note that the objective function depends on the league structure in different
countries. Quirk and El Hodiri (1974) derived utility maximization from observing owner behavior in North American
professional sports. They developed a dynamic decision-making model by team owners which is built around a substitution
decision between utility from winning and profit. They also explicitly incorporated an early version of a contest success
function by accounting for the probability of winning based on team talent choices relative to team investments by
competitors. While Quirk and El Hodiri (1974) essentially built their objective function on the same variables as Sloane
(1971), later literature used more restrictive versions. Késenne (1996) reduced utility to win maximization given a breakeven
constraint. Rascher (1997) postulated utility as an owner trade-off between winning and profits. Vrooman (1997) defined a
utility maximization function in the context of Major League Baseball as a maximization function of team value and
satisfaction from winning. He also showed that team values are lower under utility maximization than under profit
maximization. Recent scholars added certain parameters, like competitive balance impacts and market size (Dietl,
Grossmann, & Lang, 2011), and re-formulated the relationship between profits, winning, and attendance in the utility
maximization function (e.g., Madden & Robinson, 2012), but essentially build on the original works. Opponents of the profit
maximization function in English football point to team salaries in excess of the marginal revenue product (Cairns, Jennett, &
Sloane, 1986; Késenne, 1996), although other objective functions than utility maximization may fulfill that condition as well
(Fort, 2015).
The relevance of objective functions is not only rooted in the explanatory power on the behavior of clubs and owners, but
also on the survival of clubs. The survival of clubs with various objective functions in the same league is of some debate (e.g.,
Cairns et al., 1986). Fort and Quirk (2004) argued that leagues with profit maximizers and leagues with win maximizers can
be distinguished in the talent market by higher team investments and greater demand for talent in the win maximizing
setting. They suggested that owners can be nudged to one or the other objective to increase competitive balance. Garcia-del-
Barrio and Szymanski (2009) empirically compared profit and win maximization in English and Spanish football, and find
that clubs are closer to win than to profit maximization. Zimbalist (2003) assumed a diversity of owner objectives within a
given league.
More recently, clubs have also been suggested to maximize a mix of profits and wins (Vrooman, 2000). While the
franchise owners in American major sports leagues are typically portrayed as profit maximizers (Fort & Quirk, 1995; Quirk &
Fort, 1992), European football clubs have been argued to maximize wins or utility subject to a profit constraint (Késenne,
1996, 1999, 2006; Kounetas, 2014).

2.1.2. Efficiency, resources and investments

Having reviewed the literature on the output side of the production function, we turn to the resources and investments on
the input side used to generate the outputs. Traditionally, inputs are assumed to be unconstrained. Profits are generally
assumed to depend on playing talent (Espitia-Escuer and García-Cebrián, 2004, 2010; Fort & Quirk, 1995). On the other hand,
national sporting success is typically argued to depend on team investments in the form of wages paid to players and transfer
investments paid to other clubs (Késenne, 1996; Leach & Szymanski, 2015; Szymanski & Smith, 2010). Szymanski (2011) has
shown that transfer and wage payments are roughly proportional to each other and suggested that both may be used
interchangeably to measure the relationship between team investments and team performance.

4
By ‘health of the league’, Sloane (1971) refers to Rottenberg’s uncertainty of outcome hypothesis.
566 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581

While team investments and resources undoubtedly positively impact sporting performance of teams (Barros, Garcia-
del-Barrio, & Leach, 2009; Forrest & Simmons, 2002; Frick & Simmons, 2008), some researchers also argue in favor of
inefficient behavior. For example, English football clubs have been shown to overspend inputs in maximizing league points
and revenues (Haas, 2003a). Spanish and French clubs have been determined to be inefficient with respect to their own cost
frontiers (Barros, del Corral, & Garcia-del-Barrio, 2008; Barros, Peypoch, & Tainsky, 2014). Espitia-Escuer and García-Cebrián,
(2004, 2010) applied a Data Envelopment Analysis (DEA) approach to teams in the Spanish 1st division and the Champions
League and found that teams are inefficient in converting team inputs into national and international sporting success. In a
theoretical study, Szymanski (2007) analyzed the existence of an ideal competitive balance between teams in a sporting
contest based on the Coase theorem. This theorem states that with zero transaction costs, markets will be fully efficient
without any externalities and the need for regulatory intervention.5 He showed that the Coase theorem does not hold in
leading European football, strengthening the hypothesis of an inefficient market and highlighting the need for further
studies of the influence of club managers on efficient usage of resources.
In the analysis of inefficient usage of club resources, team investments have received special attention. The so-called
overinvestment phenomenon, that is, the phenomenon of steadily increasing investments by clubs in combination with an
under-proportional increase in output is often referred to as a “rat race” in appreciation of a seminal paper by George Akerlof
(1976). This behavior is fueled by escalating price moneys and price spreads which incentivize managers to invest more
effort and pay higher wages and transfer fees (Feddersen, Humphreys, & Soebbing, 2012; Rohde & Breuer, 2017a).
Externalities to other clubs of this non-cooperative talent investment by clubs include a relative reduction in competitor
quality and a potential reduction in competitive balance which would lead to a lower interest in the league (Szymanski,
2003, 2004). In a football context, the classic overinvestment hypothesis describes investments by clubs which lead to a
reduction in league revenues as consequence of negative externalities on the club’s direct competitors (Franck, 1995; Dietl,
Franck, & Lang, 2008). This classical overinvestment hypothesis only focuses on the justification of sporting success and
neglects the importance of indirect revenues. The league revenue perspective is complemented by a club perspective of
overinvestment which is often used synonymously to rat races in a sporting context. For example, overinvestment has been
linked to wasting revenues and profits and increasing the risk of insolvencies on behalf of clubs (Franck, 2014; Müller et al.,
2012). To sum up, both club managers and leagues should be interested in reducing externalities of overinvestments.
The most prominent approach limiting investments by clubs is the so-called UEFA Financial Fair Play (FFP) legislation.
This legislation restricts investment levels by participants in UEFA competitions relative to club revenues. Generally, clubs
are not allowed to pay more than s5 m in excess of the earnings over a three-year period. If fully covered by the owner, the
deficit may be increased to up to s45 m until 2015, and up to s30 m afterwards. As a consequence, managers may reasonably
assume a fix set of inputs which they need to convert most efficiently into outputs. Competitiveness is increasingly
determined by efficient management rather than the maximization of team investments by attracting private funds. That is,
the UEFA FFP may be expected to further incentivize efficient management and re-open the discussion on the attractiveness
of different ownership structures.

2.2. The influence of ownership models on performance and efficiency of professional football clubs

After the review of the production process of converting team inputs into profits and sporting success, we discussed the
importance of absolute and efficient team investments. Having hypothesized an increasing importance of efficient team
investments, managerial decisions are in the center of interest. One particular managerial decision influencing team
investments is the choice of ownership models.

2.2.1. Private investors

The importance of ownership structures is mainly based on the availability of resources and the incentives by owners to
contribute these resources. According to property rights theory, owners have higher incentives to invest if they own the
majority share in the entity (Demsetz, 1967, pp. 354–35).
In the management literature, the change between private and public ownership is a well-studied subject. Initial public
offerings tend to be associated with a short-run over-performance, but a long-run under-performance (e.g., Jain & Kini, 1994;
Ritter, 1991). On the other hand, the management literature provides two common explanations for going-private
transactions which are wealth creation and wealth transfer. Some researchers argue that private ownership allows for a
more efficient ownership structure and allocation of residual claims, resulting in superior performance and wealth creation.
Other researchers argue in favor of a mere wealth transfer to the new shareholders. Based on agency theory, Muscarella and
Vetsuypens (1990) studied the alignment of managerial incentives toward value maximization under private ownership. In a
sample of 72 corporations which temporarily went private after a leveraged buy-out before re-entering the capital markets,
the authors found that companies under private ownership have initiated restructuring measures leading to significant
improvements in profitability and efficiency. The study suggests that the increased efficiency is due to more efficient
ownership structures and allocation of residual claims under private ownership. In another study, Berger et al. (2005)

5
The interested reader shall be pointed to Coase (1960, 1988) and Szymanski (2007) for a more detailed theoretical explanation and analysis of the Coase
theorem.
 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581 567

explored the impact of private and state ownerships among financial institutions. Berger et al. (2005) found a static effect, a
selection effect and a dynamic effect of private investors in banks. That is, private investors significantly improve
performance (dynamic effect), and acquired banks performed particularly poor before acquisition (selection effect). Banks
without private investors underperform in the long-run (static effect).
The impact of private owners on the sporting success, profitability, and efficiency of professional sports clubs has been
studied by management scholars and by sports economists. Exploring Major League Baseball franchises, Vrooman (1997)
suggested that so-called sportsman owners (i.e., owners who prefer winning games beyond the profit maximum) increase
winning but decrease franchise value. Franck (2010) adopted the owner research to European professional football. He
argued that private investors increase team investments and debt, but reduce profitability. Further, he suggested that leagues
with private owners are characterized by competition based on spending power rather than profitability. In a contest-
theoretical study, Lang, Grossmann, and Theiler, 2011 confirm that sugar daddies (i.e., individuals investing high amounts of
money into clubs and becoming their owners) increase winning percentage and revenues. Sugar daddies of large market
teams would also increase social welfare, but decrease competitive balance. Further theoretical and conceptual studies on
sugar daddy owners found a positive influence on soft budget constraints, riskiness of investments, and volatility of revenues
(Franck & Lang, 2014; Storm & Nielsen, 2012).6 Moreover, majority shareholders have been argued to increase agency
problems and financial dependence (Dimitropoulos, 2011; Shleifer & Vishny, 1997). Hamil (2013) examined ownership
structures in five European countries, and determined that member-association ownership is an increasing phenomenon to
rescue bankrupt clubs. In contrast, Rohde and Breuer (2016a) explored ownership structures amongst Europe’s elite football
clubs and found that the private majority ownership model is an increasing phenomenon among the top 30 revenue-
generating clubs.
Although several researchers acknowledge the importance of managers (Barros & Leach, 2006; Dobson & Goddard, 2011)
and despite Billy Beane’s well-known Moneyball approach (Lewis, 2004), there are only a few empirical studies that have
actually analyzed the impact of managers on the efficiency of clubs. Those which do generally compare the efficiency of
managers based on efficiency scores7 attributed to individual managers, but often lack statistical explanations for
managerial inefficiency (Dawson et al., 2000; Haas, 2003a). We address this research gap.

2.2.2. Foreign private investors

The effect of foreign investors on performance and efficiency of institutions and the competitiveness of the national
market is particularly well studied in the banking industry. Foreign owned banks have advantages in serving multinational
customers by setting up offices in the home countries of the owner (e.g., Goldberg & Saunders, 1981). Additionally, they may
have better access to capital markets, superior ability to diversify risks, and the ability to offer some services to multinational
clients not easily provided by domestically-owned banks (Berger, Clarke, Cull, Klapper, & Udell, 2005). On the other hand,
disadvantages of banks run by foreign investors include managing from a distance, dealing with regulatory challenges, and
accessing local information (e.g., Berger, Dai, Ongena, & Smith, 2003; Buch, 2003). Overall, most efficiency studies of banks
run by foreign investors find that those banks are less efficient than domestically-owned institutions (e.g., Berger, DeYoung,
Genay, & Udell, 2000; DeYoung & Nolle, 1996; Lensink, Meesters, & Naaborg, 2008). However, some scholars also suggest that
foreign-owned banks outperform domestically-owned ones, for example, due to the superior access to capital (e.g., Bonin,
Hasan, & Wachtel, 2005; Claessens, Demirgüç-Kunt, & Huizinga, 2001). Finally, foreign ownership has been associated with
more competitive national banking systems (Claessens & Laeven, 2004; Martinez Peria & Mody, 2004).
For professional football clubs, the origin of private investors matters for two key reasons. Firstly, investors have been
argued to pursue different objective functions depending on their origin (Nauright & Ramfjord, 2010). While European
investors have been associated with win maximization, US investors have been argued to be closer to profit maximization.
Secondly, foreign investors tend to own and contribute larger financial resources than domestic owners (Rohde & Breuer,
2016b). For example, foreign majority owners in the English Premier League have been estimated to have an average wealth
of $5.1bn at their disposal compared to $3.2bn by domestic majority owners and $0.06bn by distributed owners. According to
the resource dependency theory (Pfeffer & Salancik, 1978), organizations like clubs are unable to generate all required
financial resources on their own. Rather, the two key challenges are to get access to the resources from additional sources and
to concentrate resource control. If private club owners also control the access to private or larger corporate resources, private
owners and investors can inject additional external financial resources into the club. Based on these insights, the
hypothesized impact of foreign investors on financial and sporting efficiency is ambiguous. On the one hand, foreign
investors may drive overinvestments and increase inefficiency. On the other hand, innovative revenue streams and an
increased focus on profitability particularly by US investors may increase financial efficiency. While empirical studies
confirm a positive impact of (particularly foreign) majority owners on team investments and a negative impact on
profitability (Rohde & Breuer, 2016a, 2016b), these analyses have in common that they consider team investments as a
flexible measure under the decision authority of the owner. However, tight budget controls and mostly the UEFA FFP
regulation are likely to restrict team investments relative to club revenues. Theoretical research forecasts a decrease in team
investments by UEFA FFP (Sass, 2016).

6
For a more detailed literature review on the impact of private investors in European professional football, we refer to Rohde & Breuer (2017b).
7
Efficiency scores summarize the efficiency of a decision making unit on a scale from 0 to 1, with 1 indicating full efficiency.
568 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581

2.3. Ownership models in English and French professional football

Since the choice of ownership structures in European professional football depends on the national and league context,
we will next provide a short overview of the ownership models in English and French football.
Andreff (2007) analyzed the French football ownership structure in more depth, and found weaknesses in financial
discipline, transparency and disclosure. He suggested that shareholders behave as “patrons”, that is, non-profit seeking
investors aiming to attract the best possible players independent of being able to balance the team investments by new
income sources. Clubs had to convert into private companies or public listed corporations, but some are still controlled by the
member association (Gouguet & Primault, 2006). The most common French governance model is that of the SASP. By
June 2012, 18 of 20 Ligue 1 clubs are registered as SASP. AJ Auxerre is registered as SAOS, and AC Ajaccio is registered as EUSRL.
Both are controlled by the member associations. Further French clubs (Stade Brest, SM Caen, Dijon Football, LBD
Chateauraux, EAD Guingamp, FC Istres, Stade Lavallois, Chamois Niortais, GFC Ajaccio) are still controlled by the
member association at the beginning of the 2012/2013 season. Nevertheless, we have seen a clear trend from member
associations shifting control to private owners. In total, eight professional clubs from the first two French divisions pursued
this approach between 2006 and 2012. The question arises whether clubs majority-owned by private investors have
successfully increased the financial and sporting efficiency of clubs, or, whether patronage has merely led to an increase in
spending.
Also, the English football industry has been characterized by financial difficulties and clubs entering administration
despite strongly growing league revenues (Buraimo, Simmons, & Szymanski, 2006). Some key reasons include excessive
wage costs, unused stadium capacity, and the inability to adjust revenue and cost structures after relegation. From a
governance perspective, most clubs already converted into joint stock companies in the late 19th century, and at the time of
the study all English Premier League clubs are registered as private limited companies (“Ltd.”) or public corporations (“PLC”)
(Leach & Szymanski, 2015). Many clubs have been taken private by new owners after delisting of the club. About 13 clubs
have transitioned from distributed ownership to control by a majority investor. The most important trend in English
professional football, however, is the entry of foreign private investors. In total, 19 professional football clubs from the first
two English divisions have been taken over by foreign private majority investors between 2006 and 2012.

3. Theoretical model and hypotheses

We define two possible ways in which efficiency can be interpreted. Firstly, sporting efficiency shall refer to the
conversion of team investment into national league success (i.e., the odds of league ranks achieved in the national league).
Secondly, financial efficiency shall refer to the conversion of playing talent and market potential into operating profits.
Therefore, we use two unbalanced panels covering all English Premier League (n = 140) and French Ligue 1 club observations
(n = 140) from 2006 to 2012. The inefficiency values determined in the generation of profitability and sporting success per
club and season are used as dependent variables that will be explained by ownership variables that are at the disposal of club
management. The impact of these management decisions on club efficiencies can be summarized based on the available
literature in the following three hypotheses:

3.1. The influence of ownership structures on efficiency

Professionalization increases financial and sporting efficiency. Since private majority investors have been linked to
investing in the club’s management and infrastructure (Franck, 2010; Hamil & Walters, 2010, p. 15; Leach & Szymanski,
2015), we may phrase the following hypothesis.
Hypothesis 1a. Private majority investors are assumed to increase financial and sporting efficiency.
Patronage decreases financial and sporting efficiency. Since majority owners have been stated to regularly engage in
patronage (Andreff, 2007; Demsetz, 1967, pp. 354–35), we may state the alternative hypothesis.
Hypothesis 1b. Private majority investors are assumed to decrease financial and sporting efficiency.
Overinvestments have been linked to the available resources of club owners (Dietl et al., 2008; Franck, 1995). Foreign
private majority investors have been argued to be a good proxy for the wealth or available resources of club owners in the
absence of reliable panel data8 (Rohde & Breuer, 2016b). Thus, we predicted:
Hypothesis 2a. Foreign private investors are assumed to decrease sporting efficiency.
A stricter profit orientation increases financial efficiency. Foreign private investors have been argued to follow a stricter
profit orientation (Nauright & Ramfjord, 2010). Thus, we hypothesized:

8
While our empirical model is based on panel data, we have not been able to obtain panel data on the wealth of private owners. However, static analyses
by Rohde and Breuer (2016b) based on data by Forbes and Deloitte indicate that owner origin is a good proxy for the wealth of owners.
 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581 569

Hypothesis 2b. Foreign private investors are assumed to increase financial efficiency.
Foreign private investors have been argued to overinvest (Dietl et al., 2008; Franck, 1995; Kuper, 2009). From this
perspective:
Hypothesis 2c. Foreign private investors are assumed to decrease financial efficiency.

3.2. Survival of ownership structures

After determining the influence of ownership structures on efficiency, we aim to shed light on the question if the more
efficient ownership structures will survive and increase efficiency.
We expect less efficient teams to leave the league. Further, we expect that average efficiencies tend to increase over time.
Thus, we predicted:
Hypothesis 3a. Those ownership structures will survive which will allow clubs to maximize efficiency.
Previous literature has shown that team investments positively influence sporting success, and team talent positively
influences profit. These are the classic profit and win maximization functions. If ownership structures increase investments,
but decrease efficiency at the same time, we would expect that those ownership structures tend to increase in numbers in
the top division and to decrease average efficiencies. Therefore, we hypothesized:
Hypothesis 3b. Teams do not compete based on efficiency, but primarily based on investments.

4. Methods

4.1. Data source and collection

4.1.1. Sample and generalizability

This research builds on two unbalanced samples of 32 clubs from the English Premier League and 32 clubs from French
Ligue 1 covering the seven seasons from 2005/06 to 2011/12. The English Premier League is of special interest due to its high
within variation of foreign private ownership, while French professional football is characterized by member associations
transferring control to private companies. By using unbalanced panels, we are able to include all teams promoted to or
relegated from the respective first division during the observation period. Each season includes 20 club observations per
league. Implications of the efficiency impact of ownership structures are of high relevance for European professional football
in general, but national specificities of the club sample need to be considered when generalizing results. For example, the
English Premier League has a peculiar ownership structure characterized by a historically early transformation into joint
stock companies and a strong American influence on the league (Nauright & Ramfjord, 2010). The French ownership
structure is special due to the regulatory requirement that clubs had to transform into private companies or public listed
corporates, but may still be majority-owned by member associations (Gouguet & Primault, 2006). These specificities need to
be kept in mind when interpreting results.

4.1.2. Data sources

Financial information on profits and wages are published in Deloitte’s “Annual Review of Football Finance” for the English
Premier League and in DNCP’s “Comptes Individuels Des Clubs” for Ligue 1. The Deloitte data are sourced directly from the
clubs, based on the company or group financial statements, and corrected for special items. DNCP, the financial control
commission of French professional football, also sources the data directly from the clubs. Market values were added from a
reliable database specialized on player valuation (http://www.transfermarkt.de).9 While the database may be criticized for
its crowdsourcing approach based on expectations of market experts on player and team values, it has been shown to
accurately predict actual transfer fees (Herm, Callsen-Bracker, & Kreis, 2014) and has established as standard reference in
sports economics research of European football (e.g., Bryson, Frick, & Simmons, 2013; Frick, 2007, 2011; Weimar & Wicker,
2017). Frick and Simmons (2014, p. 216) reviewed salary models in European model, and concluded that
in the absence of
direct player salary data
recorded market values for players produce plausible rankings of player’s talent. Herm et al.
(2014) showed that community evaluations can be explained by variables directly related to players’ talent and variables that
result from judgments by external sources (e.g., journalists). This strengthens our approach of using team market values as
indicator of team talent. Frick (2011) shows that actual Bundesliga salaries strongly correlate with player market values
posted by Kicker magazine at a correlation coefficient of r = 0.67 for all team payrolls in all seasons from 1996 to 2007, and at
r = 0.8 in a subset of actual published player salaries. Peeters (2017) demonstrated that crowd-generated player market
values can produce fairly good predictions of football match results. National league points per season have been drawn from
another reliable database covering comprehensive football statistics (http://www.kicker.de). The remaining data on

9
Note that
in contrast to franchise values
here market values refer to the total value of a team’s players as indicator of team talent.
570 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581

ownership structures have been sourced from official sporting databases (e.g., Premier League Handbook, DNCP, Forbes, The
Guardian), business registers (e.g., Companies House), club homepages and annual reports.

4.2. Measures

In the following we introduce the key variables used to measure financial and sporting output, the corresponding club
resources, and managerial efficiency (Table 1).
Profitability was measured by the operating profit to reflect the core operating activities. Due to the right-skewed variable
distribution and in line with the logarithmic properties of the Cobb-Douglas function, profits were logged (“LN_PRO”). Before
logging, profits were shifted to generate positive values. This data transformation has been made because profits may be
negative. In line with standard economics literature, profits are transformed by adding the absolute value of minimum
profits plus one to actual profits. This procedure ensures that LN_PRO is defined in [0,+1).10 Fundamental club resources for
the generation of profits include team talent and the market potential (Espitia-Escuer and García-Cebrián, 2004; Fort &
Quirk, 1995; Haas, 2003b). Thereby team talent determines the club’s playing strengths and was measured by the logarithm
of team market value in sm per club and season (“LN_MV”). That is, the profit maximization function for team i in season t is
given by:
LN_PRO it = a + b * LN_MV it + sit, (1)
where sit are the random errors of club i in season t.National sporting success will be measured by the log odds of league rank
(“LN_ODDS_RANK”) which have been proven well as a measure of national sporting success in previous studies (Garcia-del-
Barrio & Szymanski, 2009; Szymanski & Smith, 1997) and also fulfill the logarithmic properties of the Cobb-Douglas
function.11 Szymanski and Smith (1997) performed the log odds transformation to obtain linearity of the estimated
relationships. A further benefit of using the log odds rather than the league rank itself is the characteristic of increasing
returns to performance (Garcia-del-Barrio & Szymanski, 2009). This seems plausible as, for example, the perceived value gap
between the championship and a second place is larger than that between, say, a tenth and eleventh place. Wages have been
shown to be the key resource for the generation of sporting success (Szymanski & Smith, 2010). Due to the right-skewed
variable distribution, we used the natural logarithm of team wage costs (“LN_WAG”). The maximization function of sporting
success for team i is then given by:
LN_ODDS_RANK it = c + d * LN_WAG it + sit. (2)
In a final step, the inefficiency from the conversion of club resources into profits and national league success was
explained by ownership variables under the influence of team management. The ownership structures are operationalized
based on property rights theory (Demsetz, 1967; Rohde & Breuer, 2016a, 2016b). To reflect the majority share, we used
dummy variables for clubs owned by private majority investors (“INV_MAJ”) and foreign private majority investors
(“INV_MAJ_FOR”). If a private investor owns more than 50% of the shares, INV_MAJ will take the value of 1, and 0 otherwise.
Similarly, if a foreign private majority investor owns more than 50% of the shares, INV_MAJ_FOR will take the value of 1, and 0
otherwise.

Table 1
Overview of variables.

Variable type Variable Description Scale

IDs clubid2 Club ID (ENG, FRA) Metric
Dependent variables (DVs) pro Operating profit before player trading activity (sm) Metric
pts Number of national league points (#) Metric
odds_rank Odds of league rank ((X
Pit)/Pit), with X being the number Metric
of effective positions in the league plus one (21 in ENG1, FRA1),
and Pit being the league position achieved in season t
Independent variables (IVs)
Frontier mv Market value (sm) Metric
wag Team wage costs (sm) Metric
Independent variables (IVs)
Inefficiency inv_maj Private majority investor (1 = yes; 0 = no) Dummy
inv_maj_for Foreign private majority investor (1 = yes; 0 = no) Dummy

10
The profit transformation of the form log(Profit) = log(Profit + |ProfitMin| + 1) is a standard approach in economics literature (e.g., Berger & Mester, 1997;
Maudos, Pastor, Perez, & Quesada, 2002)
11
The log transformation follows the equation: LN_ODDS_RANK = LN((X-Pit)/Pit), whereby X is equal to the number of ranks in the league (which is 20 in
both Ligue 1 and the English Premier League), and Pit is the league position achieved by club i in season t.
 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581 571

4.3. Data analysis

The data analysis is structured as follows. First, we present descriptive statistics including mean, variance, minimum and
maximum for all variables. Second, we implemented a SFA based on the Battese and Coelli (1995) model. By modeling the
profit and win maximization functions in the respective production function and incorporating the ownership variables into
the efficiency term, we aim to test our hypotheses on the influence of the ownership models on the financial and sporting
efficiency of the clubs.12 The two full samples contain 140 observations each. Due to some missing observations on profits
and wages, the English profitability model contains 137 observations while the English sporting success model contains 138
observations.13 As discussed above, the English and French leagues feature different regulations and settings for ownership
models which is why we will model the two leagues separately. The first part of the model determines efficiency scores by
club. Then the financial and sporting efficiencies determined in the first step will be explained on the basis of club ownership
decisions. Finally, we analyzed the development of financial efficiencies among certain ownership structures. We tested the
hypothesis that the most efficient club will survive (“competition by efficiency hypothesis”). The alternative hypothesis is
that ownership structures will survive which will allow clubs to maximize investments (“competition by investments
hypothesis”). The model selection deserves some special attention.
The origins of efficiency analysis date back to the 1950s when Debreu (1951) and Farrell (1957) explored management
inefficiency and developed an input-based measure of productive efficiency. Following the economics principle, efficiency
can be defined as maximization of output with given input or as minimization of input with given output (Debreu, 1951;
Farrell, 1957). Efficient frontier analyses consider those units with the maximum output input relationship as efficient
benchmark. Together, the efficient units build the marginal production function, the so-called efficient frontier which is used
as reference to evaluate the efficiency of the remaining units. The error term (i.e. the residual of interest) will be explained as
the inefficiency. Compared to conventional least-squares models, such as OLS, frontier models allow to explain deviations
from the efficient frontier partially by inefficiency instead of attributing deviations from maximum output exclusively to
statistical noise (Charnes, Cooper, & Rhodes, 1978). As we summarized previously, Europe’s elite football clubs are not fully
efficient. Thus, we favor frontier models. Secondly, SFAs are preferred over DEAs for this study due to the availability of
econometric tests for the validity of the model specification including functional form and distributional assumptions
(Battese & Coelli, 1988). The stochastic frontier model is used in a large literature of studies of production, profit and other
models of goal attainment (Greene, 2008). Thereby, SFAs define technical efficiency of the input-output vector relative to the
best observed practices in the sample which define the efficient frontier. In contrast to DEAs, SFAs explain the deviation from
the stochastic frontier through a mix of inefficiency and random noise. That is, the combined error term is split into a noise
and an inefficiency term. Following the original stochastic frontier model formulation by Aigner, Lovell, and Schmidt (1977),
the model can be formulated as:
y = b * x + v
u, (3)
where y is the observed outcome (goal attainment), b * x + v is the optimal, frontier goal (e.g., maximal production output or
minimum cost) pursued by the individual, b * x is the deterministic part of the frontier, v  N[0,sv2] is the stochastic part,
and u  N[0,su2] is the inefficiency part. Thirdly, several frontier models have been suggested with different assumptions on
the allowance for time-variation of the inefficiency term, the distribution of the inefficiency term, and the separation of
time-varying inefficiency from unit specific time invariant unobserved heterogeneity (Belotti, Daidone, Ilardi, & Atella,
2012). Time-invariant models (Battese & Coelli, 1988; Pitt & Lee, 1981) and models following a two-step process for the
determination of the stochastic frontier and the inefficiency model (Battese & Coelli, 1992; Kumbhakar, 1990) have been
determined to be potentially biased (Wang & Schmidt, 2002). In contrast, the Battese and Coelli (1995) model is a time-
varying, simultaneous approach which avoids the bias inherent to time-invariant or two-step approaches. The Battese and
Coelli (1995) model assumes a truncated normal distribution of the inefficiency term and uses a maximum likelihood
estimation method. Furthermore, the model assumes that the inefficiency effects are stochastic and independently
distributed. The Battese and Coelli (1995) model has been found to produce good estimates for small sample properties (Lee
& Shin, 2014). For an exhaustive categorization and survey of stochastic frontier models and potential applications to sports
economics, we point the interested reader to Lee (2014). The Battese and Coelli (1995) model builds on the standard
stochastic frontier production function for panel data. This time-varying model allows correcting for heteroscedasticity and
incorporating exogenous influences on managerial inefficiency at the same time. It assumes a log-linear production function
for i firms over t periods of time, and follows the standard formulation Aigner et al. (1977) (see Eq. (1)).
The model specification needs to define the orientation, functional form, and potential fixed effects. In line with standard
sports economics literature (Fort & Quirk, 1995; Neale, 1964; Quirk & El Hodiri, 1974; Sloane, 1971), our focus is on the
maximization of profitability and national sporting success. We will thus follow an output orientation, that is, output will be
maximized with given inputs (Cook, Tone, & Zhu, 2014). Since our sample is subject to different technologies with respect to

12
We perform our analysis with the novel “sfpanel” command introduced by Belotti et al., 2012. The “sfpanel” command is a new Stata command for panel
data stochastic frontier models that allows estimating a much wider range of SFA models with time-varying inefficiency compared to Stata’s official
“xtfrontier” command.
13
We would like to thank Julio del Corral for his recommendations on revising the original sample selection for the national sporting success model.
572 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581

national leagues, we may either use a metafrontier approach14 or split the sample (Rao, O'Donnell, & Battese, 2003). Since the
focus of our study is on the explanation of inefficiency, that is, a content-related rather than a methodological focus, we
decided in favor of the latter approach. Moreover, we decided in favor of a fixed effects model to control for unobservable
season heterogeneity. We tested the adequacy of Cobb-Douglas as functional form by performing a likelihood ratio test. This
tests the null hypothesis that Cobb-Douglas is an adequate representation of the data (Coelli, Rao, & Battese, 2012).15 In our
case, the null hypothesis could not be rejected at the 5% level. That is, the assumptions of additivity and homogeneity implicit
in the Cobb-Douglas form are consistent with the data. We therefore use a Cobb-Douglas functional form representing the
fundamental input and output variables established in the profit and win maximization literature. Following the profit and
win maximization functions discussed above, the final stochastic frontier production functions look as follows:
LN_PRO it = b0 + b1 * LN_MV it + vit
uit (4)

LN_ODDS_RANK it = b0 + b1 * LN_WAG it + vit
uit (5)

where: vit = random errors independently distributed of uit; and
uit = random variables associated with technical inefficiency of production.
uit is independent and identically distributed and a non-negative random error term that accounts for technical
inefficiency in production. The technical inefficiency effect is determined through the club ownership variables which may
be decided upon by club management:
uit = d0 + d1 * INV_MAJit + d2 * INV_MAJ_FORt + wit (6)
2
where wit = truncation of the normal distribution with zero mean and variance, s , such that the point of truncation is
zit d,
i.e., wit >
zit d.
We generally adopt the same equations for the English Premier League and Ligue 1, but analyze the samples separately
due to the national specificities discussed before. For the French efficiency equation, we drop the INV_MAJ_FOR due to low
with-in variation of foreign ownership. This is to prevent a potential small-sample bias for the rare event of foreign investors
acquiring majority shares in the French sample (King & Zeng, 2001).16 The analysis of the signs and significance of the
ownership coefficients will allow us testing our hypotheses for each sample.17
Based on profit maximization literature, we expect to see positive coefficients of LN_MV. Also, we expect to see a positive
coefficient of LN_WAG in the sporting success equation. These relationships have been analyzed extensively by previous
researchers. The core focus of this paper is on the coefficients of the inefficiency function. The expected coefficients of the
ownership variables are determined by our hypotheses. Based on hypothesis 1, for example, the coefficient scores of INV-MAJ
may be interpreted as follows. Based on the professionalization argument (Hypothesis 1a), we expect to see negative
coefficients of INV_MAJ indicating a negative influence of private majority investors on the inefficiency u (i.e., a positive
influence on efficiency). In comparison, the alternative hypothesis (Hypothesis 1b) which is based on the governance impact
of majority investors, would predict positive coefficients of INV_MAJ indicating a positive influence on inefficiency (i.e., a
negative influence on efficiency).

5. Results and discussion

5.1. Descriptive statistics

The summary statistics for all variables in the model are displayed in Table 2. On average, Premier League teams generate
positive operating profits (PRO) of s7.0m, while Ligue 1 clubs generate operating losses of s6.4m. Premier League teams
benefit from higher direct rewards, mostly based on TV revenues. In terms of national league success, the Premier League is
subject to a slightly higher variation with points (PTS) ranging from 11 to 91 compared to 20 to 84 in Ligue 1. As both leagues
are composed of 20 teams, the odds of league ranks are distributed equally for both leagues. All input variables have higher
average values in the Premier League than in Ligue 1. An average market value (MV) of s149.5 m and wages (WAG) of s81.7 m
in the Premier League compare to less-than-half market values (s65.2m) and wages (s36.1m) in Ligue 1. In both leagues,
over 80% of clubs are controlled by private majority investors (INV_MAJ). However, the Premier League has a much higher
share of clubs controlled by foreign private majority investors (INV_MAJ_FOR) (43.6%) compared to Ligue 1 (6.4%).

14
A metafrontier approach explicitly caters for non-homogeneous technologies. This may apply, for example, to firms operating under different
technologies. In our case, clubs operate in different leagues or divisions with different regulations and other sample characteristics.
15
The Cobb-Douglas functional form is based on strong assumptions on demand elasticities and elasticities of substitution. These assumptions are relaxed
in the translog model.
16
The transition probabilities for INV_MAJ_FOR in the Ligue 1 sample account to <2% to transition from not majority-owned to majority-owned by a
foreign investor.
17
Technically, the equality of coefficients between two samples may be compared through a Wald test in a nested model. However, to our best knowledge,
this approach is not feasible for the coefficients in the inefficiency function of the SFA model by Battese and Coelli (1995).
 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581 573

Table 2
Summary statistics.

Variable type Variable ENG1 FRA1

N Mean SD Min Max N Mean SD Min Max

IDs clubid2 140 140
DVs PRO 137 7.03 30.14
94.06 116.01 140
6.35 18.09
58.62 105.10
PTS 140 52.14 17.12 11 91 140 51.31 13.10 20 84
ODDS_RANK 140 2.78 4.57 0.05 20 140 2.78 4.57 0.05 20
Frontier IVs MV 140 149.50 112.53 18.75 467.5 140 65.28 43.35 2.15 223.1
WAG 138 81.72 57.68 25.45 457.11 140 36.13 22.88 9.74 117.34
Inefficiency IVs INV_MAJ 140 85.0% – 0 1 140 80.7% – 0 1
INV_MAJ_FOR 140 43.6% – 0 1 140 6.42% – 0 1
N 140 140

5.2. Explanation of inefficiency

Our focus lies on the explanation of inefficiency. The capability to do so is a key advantage of the Battese and Coelli (1995)
model. The results of the inefficiency effects model are summarized per dependent variable and per league, and are
structured into three key parts comprising the stochastic frontier model (explaining the impact of club resources on
profitability and sporting success), the inefficiency model (explaining the estimation error for the technical efficiencies by
managerial inefficiency u and random noise v), and a final section on variance parameters and model evaluation (Table 3).
Positive coefficient estimates in the inefficiency function u are to be interpreted as increasing the inefficiency.
The stochastic frontier model generally confirms the hypotheses, that the available club resources have a positive impact
on profitability and sporting success. Team market values (LN_MV) have a statistically significant and positive impact on
profitability (LN_PRO) in Ligue 1 (p < .01) and the Premier League (p < .05) This confirms the standard relationship
established in the profit maximization literature.18 Similarly, our results confirm a significant and positive relationship
between wages (LN_WAG) and national league success (LN_ODDS_RANK) at p < .001, providing some confidence into the
robustness of our models.
The inefficiency effects models allow testing the hypotheses established in the theoretical model. Firstly, as can be seen
from the positive and significant coefficient value of INV_MAJ, our results show that private majority investors increase
financial inefficiency in Ligue 1 (p < .05). Further, private majority investors also tend to increase sporting inefficiency in
Ligue 1 (p < .001). This indicates that French professional football may deviate from insights in other industries such as the
banking industry (Muscarella & Vetsuypens, 1990), where private ownership has been associated with higher efficiency. One
straightforward explanation is that the efficient market assumptions do not hold true in professional European football
(Szymanski, 2007). Further, the results challenge the concept of patronage
the widely prevalent governance model in the
top French league which sees non-profit-seeking private investors taking over clubs and relaxing financial discipline over
managers (Andreff, 2007)
as both financial and sporting efficiency are reduced. The g-values show that the ownership
variables can explain over 60% of the prevalent inefficiency in the two Ligue 1 models (gpro = 0.94; gpts = 0.64) indicating a
good model fit. In contrast, no significant results can be found for the influence of private majority investors on efficiency in
England. A potential explanation is that private majority investors in England might be credited to successfully leverage their
concentrated property rights to counterbalance inefficiencies in profit maximization (Demsetz, 1967). Secondly, the results
reveal that foreign private majority investors (INV_MAJ_FOR) significantly increase financial and sporting inefficiency in the
Premier League at p < .001. While previous theoretical and empirical studies have suggested a positive impact on team
investments (Rohde & Breuer, 2016a, 2016b), our results indicate that clubs owned by foreign majority investors tend to
compete by investments rather than efficiency. Considering the availability of club resources by foreign owners in the
English Premier League, the results support our hypothesis that the availability of resources of club owners decreases
efficiency. This seems plausible as other owners may consider financial funds a scarce resource, but most foreign owners in
the Premier League are less restricted. According to calculations by Rohde and Breuer (2016b), the average wages as share of
net wealth by foreign Premier League owners amounted to only 7% compared to 35% by domestic majority owners and 102%
by distributed owners. Thus, our results indicate that
despite the Premier League’s strong revenue base including European
football’s leading TV and media revenues
the resource dependency theory is also applicable to the Premier League.19 The
results also strengthen the “overinvestment” hypothesis (Dietl et al., 2008; Franck, 1995), since the higher sporting

18
An anonymous referee challenged whether the positive influence of team talent on profits as established mostly in the US major leagues would also
generally be true in the European football setting. We tested this hypothesis in sub-samples of profit- and loss-generating teams, and found that team
market values have a positive and significant influence on profits in the profit-generating team sample, but not in the loss-generating team sample. This
confirms the hypothesis by the referee of a “murkier” relationship between profits and market values in European football.
19
We have also cross-checked if the results are influenced by specific big spenders like Roman Abramovich or Sheikh Mansour, and our results are robust
to eliminations of individual clubs like Chelsea London or Manchester City from the analysis. The foreign investor coefficient remains positive and
significant.
574 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581

Table 3
Inefficiency effects model
Results.

DV LN_PRO LN_ODDS_RANK

Sample ENG1 FRA1 ENG1 FRA1

Stochastic frontier model: DV

LN_MV 0.0443* 0.1036**

(0.0228) (0.0356)
LN_WAG 0.5957*** 0.5551***
(0.0011) (0.0470)
Frontier model intercept 6.0885*** 5.7594*** 1.3717*** 2.4144
(0.1360) (0.1151) (0.0204) (2.9343)

Inefficiency model: Usigma (su2)

INV_MAJ
0.1969 4.2874* 0.3802 1.8977***

(0.2892) (1.7463) (0.3064) (0.4185)
INV_MAJ_FOR 5.0575*** 2.7718***
(0.3691) (0.4887)
_cons
4.1069***
4.8988(+)
3.6897***
4.5204***
(0.2302) (2.7962) (0.2498) (0.2926)

Inefficiency model: Vsigma (sv2)

_cons
20.0085
3.7005***
48.0040
3.4389***

(33.3831) (0.1423) (54.3248) (0.4090)

Variance parameters

E(su2) 1,090.46 0.3725 189.34 0.0563

sv2 158.60 0.0247 32.87 0.0321
s2 = su2 + sv2 1,249.06 0.3972 222.21 0.0885
g = su2/s2 0.8730 0.9378 0.8521 0.6370
Model evaluation

Log likelihood 53.8656 39.7066 27.8519
26.5836

Chi square 13.16 19.37 244.83 139.41
Probability 0.0014 0.0001 0.0000 0.0000
Observations 136 139 137 139

Note: Standard errors in parentheses; ***p < .001, **p < .01, *p < .05, +p < .10.

inefficiency by foreign investors can be attributed to wages exceeding the efficient level. Finally, our results complement
efficiency studies from general management literature which found that foreign-owned institutions are less efficient than
domestically-owned ones (e.g., Berger et al., 2000; DeYoung & Nolle, 1996; Lensink et al., 2008). Also, the two Premier League
models are characterized by a good model fit with g-values over 85% (gpro = 0.87; gpts = 0.85), indicating a fairly strong
explanatory power of the ownership variables.

5.3. Survival of ownership structures

Having determined a negative influence on financial efficiency of both foreign majority investors in the Premier League,
and private majority investors in Ligue 1, we explore the survival and efficiency development of those ownership structures.
Survival in the first division may be ended by relegation to the second division or a sale to new owners.
In the English Premier League, the number of clubs owned by foreign majority investors (INV_MAJ_FOR) has increased
from four in 2006 to ten in 2012. Also, we find that financial efficiencies of these clubs tend to decrease (see Fig. 1). While the
financial efficiency of clubs owned by foreign investors has decreased from 0.53 in 2006 to 0.47 in 2012, the financial
efficiency of other clubs has remained rather stable around 0.53.20 A two-sample t-test with equal variances confirms that
the technical efficiency of clubs owned by foreign investors tends to be higher than those of other clubs (p < .05). As previous
research determined a positive influence of foreign private majority investors on investments and a negative influence on
profit of Premier League clubs (Rohde & Breuer, 2016b), our findings tend to strengthen the competition by investment
hypothesis for foreign owners. However, we do not find a statistically significant decrease in technical efficiencies of clubs
run by foreign private majority investors which may be due to the comparatively short sample period of seven seasons. Also,
foreign private majority investors may be argued to be a heterogeneous group with different objective functions. We will
explore this argument further in the following chapter.
In Ligue 1, we observed a trend towards private investors acquiring majority shares in Ligue 1 clubs, but due to relegation
of clubs owned by private majority investors and promotion of clubs under the control of its members, the overall share of

20
See endnote 2.
 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581 575

Fig. 1. Financial team efficiencies for Premier League teams with and without foreign private majority investors (INV_MAJ_FOR) for the dependent variable
LN(PRO).

clubs run by private investors remained rather stable around 80%. We determine that French clubs owned by private majority
investors have significantly lower financial efficiencies (p < .05) than other clubs. Again, we find that financial efficiencies of
these clubs tend to decrease from 0.90 in 2006 to 0.83 in 2012 (see Fig. 2), but not at a statistically significant level. On the
hand, efficiencies of other clubs remain rather stable during the same period. One potential interpretation of these results is
that the French Ligue 1 is currently in a transition period of clubs owned by patron-like investors slowly leaving the league
and a new generation of investors entering the league. For example, AS Monaco got relegated in the 2010/11 season under the
ownership of the House of Grimaldi, which owned the club since 1948. In December 2011, Russian businessman Dmitry
Rybolovlev
who has been ranked among the top 100 billionaires in the Forbes list
bought a 66.7% stake in the Ligue 2
club, pledged to invest at least s100 m over the following four years, and returned the club to Ligue 1 two years later.
Nevertheless, many top clubs like Olympique Lyon, Olympique Marseille, or LOSC Lille are still owned by long-term
traditional investors. To further specify the French specificity of long-term ownership, we perform a simple regression of
technical efficiency of private majority investment (INV_MAJ) and the length of private majority investment as measured in
number of years (INV_LEN). The length of private majority investment is negatively correlated with financial efficiency
(r =
0.18). It is also negatively correlated with profits (r =
0.23) and league success (r =
0.05). Simple fixed effects panel
regressions with robust standard errors shows that the length of private majority investment (INV_LEN) has a significant and

Fig. 2. Financial team efficiencies for Ligue 1 teams with and without private majority investors (INV_MAJ) for the dependent variable LN(PRO).
576 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581

Fig. 3. Scatterplots of profit and win maximization by type of ownership structure.

negative impact on financial efficiency and profitability of Ligue 1 clubs (p < .01), and a negative but insignificant impact on
league success. This indicates that long-term patronage is unlikely to sustain in Ligue 1 in the long-run.

5.4. The peculiar nature of foreign owners

The increasing entry of foreign owners which are associated with a higher inefficiency creates a political debate about the
sustainability of these owners. Previous empirical researchers studying the correlation between profit and performance
treated teams as a homogenous group and identified a positive correlation without further analysis of different sub-groups
causing significant deviations from the linear fit. In line with Zimbalist (2003), we assume a diversity of owner objectives
within a given league. Fort and Quirk (2004) suggested distinguishing between profit maximizers and win maximizers by
the amount of team investments and the demand for talent. Based on realized club profitability and owner origin, we
distinguish between three types of owners when determining the relationship between profitability and league success
(Fig. 3). Domestic owners tend to be a rather homogenous group (Type A) with a medium correlation and slope of the linear
regression line between profits and league success (r = 0.40). This accounts to both unprofitable (top left graphic) and
profitable domestic owners (top right graphic). There are no strong outliers from the regression line of club-year
observations against profits and league points. In contrast, foreign owners are a very heterogeneous group. Loss-generating
foreign owners are characterized by a negative correlation of profits and league success (r =
0.46). These foreign owners
tend to be inefficient and “buy success” (Type B), since top league results go in line with high losses. Team investments
exceeding the efficient level can be considered as cost of satisfying utility maximization. Examples of a Type C club may be
Manchester City and Chelsea London. On the other hand, profit-generating foreign owners are characterized by a strong
positive correlation and slope of the linear fit of profits and league success (r = 0.81). These foreign owners tend to be efficient
and “operate football as a business” (Type C), since top league results go in line with high profits. Examples of such clubs are
Manchester United and Arsenal London. These insights shed additional light on the insight by Garcia-del-Barrio and
Szymanski (2009) who suggested that English clubs are closer to win than to profit maximization. Our results indicate that
this effect may be mostly due to a small group of foreign owners that want to buy success. Also, our research demonstrates
that the heterogeneity of trade-offs between profits and performance identified by previous studies (e.g., Szymanski &
Smith, 1997) is much smaller within our three ownership types.
Although the three ownership types differ with respect to their profit and win maximization and efficiency, all are able to
co-exist in a kind of polymorphic equilibrium (Hallagan & Joerding, 1983). Owners following distinctly different strategies
are able to compete in an evolutionarily stable equilibrium due to owners following different objective functions with
associated utilities.21 Grossmann (2015) developed a contest-theoretical model suggesting that evolutionarily stable

21
Note, however, that we can only observe realized profit and win maximization, and not the underlying objective function
 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581 577

strategies in sports contests generate greater investments and smaller profits than predicted by Nash’s strategies,
independent of whether clubs are profit or win maximizers. We would confirm this hypothesis for Type B club owners.
However, in our view, this argument does not hold true for Type C club owners like Manchester United and Arsenal London.
A Type B club may be happy not to compete with a Type C club, if it is able to maximize profits with given investments,
even though it is not able to win the league with this strategy. For example, Arsenal London managed to finish on 3rd or 4th
place and qualify for the UEFA Champions League in all seven seasons from 2006 to 2012. While the club did not achieve the
glory of a league title, it managed to generate consistent seven-digit profits during the period. In comparison, a utility-
maximizing Type C club like Chelsea London tends to maximize sporting success. While the club generated consistent losses
during the sample period, it managed to win the Premier League twice. These clubs are able to survive as long as the owner is
willing to inject external money, and the league administrators allow doing so. Sass (2016) suggested that the UEFA FFP will
reduce spending by sugar daddies. In fact, we believe that if the UEFA Financial Fair Play will be fully enforced, we should
expect Type C club owners to change their behavior (i.e., adjust their objective function, reduce spending, or invest more
efficiently) or leave the league.
Nevertheless, we do also find more and less efficient clubs within the individual types. Among the loss-generating foreign
owners (Type B), we find that Manchester City performed significantly below the linear regression line of profit/league
points combinations in the two seasons of 2010 and 2011. This means that even among its peers of those clubs which are
hypothesized to buy success, Manchester City may be claimed to have overinvested (Dietl et al., 2008). Among the profit-
generating foreign owners (Type C), Manchester United stands out in nearly all seasons with profit/league points
combinations above the linear regression line of all club-year observations. That is, the club was more efficient than its peers
in converting success on the pitch in operating profit. Arguably, two potential reasons may be the simultaneous participation
in the UEFA Champions League and the revenues generated from merchandise and other brand-related revenues not directly
derived from playing success.
To strengthen these results, we plot financial efficiencies against sporting efficiencies of all club-year observations (Fig. 4,
left). The results show that Type A investors are more or less equally close to maximizing financial and sporting efficiency.
Foreign investors of Type B, however, are mostly closer to maximizing sporting efficiency. This confirms that Type B investors
are not generally inefficient, but just tend to focus more on maximizing sporting efficiency rather than financial efficiency.
On the other hand, Type C investors are mostly closer to maximizing financial efficiency. When performing a residual-versus-
fitted plot (Fig. 4, right), we can find that Manchester United is generally closer to maximizing financial efficiency than
sporting efficiency. On the other end, Manchester City and Chelsea London are generally closer to sporting efficiency than to
financial efficiency. Overall, most clubs are relatively close to the predicted values. While we can only observe realized
profitability and sporting success, our results indicate that most clubs are neither clear profit maximizers nor clear win
maximizers. Rather, they are very close to a tradeoff line between financial and sporting efficiency. Thus, we see little
evidence of pure profit maximization (Fort & Quirk 1995; Neale, 1964; Vrooman, 1995) or win maximization (Késenne, 1996;
Quirk & El Holdiri, 1974; Sloane, 1971), but agree with Vrooman’s (2000) theoretical predictionand Garcia-del-Barrio and
Szymanski’s (2009) empirical observation that football clubs tend to maximize a mix of profits and wins. Thus, our results
strengthen newer theoretical contest models which assume club trade-offs between profits and wins (e.g., Dietl et al., 2011).
Finally, our results may also provide a potential solution for future empirical studies on sugar daddies. While most
previous studies did not further specify the construct of sugar daddies into an operational construct for empirical studies,
Rohde & Breuer (2016a,b); used the construct of private majority investors. Our results indicate that only a small sub-group of
unprofitable, foreign private majority investors tends to “overinvest”. In fact, the question becomes whether contest
administrators like the UEFA want to limit Type B club behavior at all, i.e. clubs shall be prevented to “buy success”, or they
only want to limit or penalize inefficient behavior within such a group.

Fig. 4. Scatterplots of financial and sporting efficiency by type of ownership structure.

578 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581

5.5. Managerial implications

Clubs, club associations, and national and European regulators are incentivized to reduce inefficiency, stimulate fan
perception of an upright sport, and “make the most” of given resources. On the other hand, efficiency may be considered a
secondary club objective following the primary objective of win (or profit) maximization. For example, club managers may
be incentivized by bonus payments for the achievement of certain titles or other sporting results. This may lead them to
invest as much into their teams as possible, even if the return of the last Euro invested is very small. This has several
managerial implications for clubs in Ligue 1 and the Premier League.
In France, clubs majority-owned by private investors tend to be more inefficient. Arguably club managers and regulatory
authorities may not need to care about “sunk investments” on behalf of club owners, as they do not lose their own money.
However, assuming managers and regulators may optimize the resource utilization while maintaining investment levels by
owners, they should re-think the currently prevalent ownership model of long-term patronage. We would like to encourage
future researchers to analyze if the long-term ownership tenure, a key difference compared to leagues such as the Premier
League, is causing a certain complacency. If so, club managers may challenge existing structures by introducing external
expertise through recruiting or external advisory. Alternatively, one might argue that the patronage model is missing
adequate checks and balances. Then managers should strengthen internal control structures, and regulators may further
encourage efficiency through external control and incentive mechanisms.
In England foreign private majority investors – with superior financial resources – tend to increase investments. However,
they also have a tendency to decrease both sporting and financial efficiency. This is particularly true for loss-generating
foreign investors. This leads to conclusions depending on the regimen pre versus post the introduction of UEFA FFP which
limits (to a certain level) club investments. Before the introduction of FFP, sugar daddy-like foreign private majority investors
may be argued to have been the preferred ownership model to drive investments and thereby sporting success. However, in
the post-UEFA FFP era there are potential benefits of a more efficiency-focused, less investment-focused operating model. A
strict enforcement of the regulation including effective penalties for non-adherence may give a competitive advantage to
those clubs operating most financially efficient with given resources.

5.6. Limitations and recommendations for future research

While we believe that ownership structures are key drivers of potential managerial inefficiency, further factors
potentially determining managerial inefficiency have been omitted. Also, the binary nature of the chosen ownership
variables may be criticized as overly simplified. For example, future studies may analyze the role of the owner origin and
resources in further depth. In the end, our foreign investment dummy only remains a proxy for owner wealth, and the
presence of actual panel data on owner wealth would benefit future studies. Further, there may be a selection issue in the
structure choice as private investors are more likely to purchase teams which are going to succeed.22 While we are able to
control for this potential selection issue in our panel through fixed effects, two potential hypotheses result which would be
worth exploring in future studies. First, as teams aim to stay competitive in the overinvestment environment of European
professional football with escalating team investment, new investors in the top divisions get richer and richer. Second, as
sales values of teams escalate as well, investors discover attractive acquisition targets in lower divisions where they are able
to compete with their teams and their private resources. Further, future studies may aim to test the survival and efficiency
development of foreign investors entering Ligue 1 – a phenomenon which has just started and which we expect to continue
in future years. Finally, we determined two very different types of foreign owners in the Premier League, a profitable one
generating football as a business, and an unprofitable one which tends to buy success. Future studies may want to determine
in more details what leads a foreign investor to fall into each of the two categories.
Also, we are subject to a few key limitations related to SFA models. While we are convinced of the benefits of the
methodology, it does not allow direct comparisons of efficiency in profit and win maximization due to the cost function
framework associated with profit frontiers. Furthermore, SFA models do not allow to test and adapt for potential reverse
causality. Previous research has discussed the presence of potential reverse causality. For example, Dobson and Goddard
(2011) argued in favor of reverse causality between revenues and sporting success, while (Hall et al., 2002) did not find any
empirical evidence of reverse causality between team performance and payroll. Since our sporting success model also builds
on team performance and payroll, we do not consider reverse causality to be an issue. Moreover, future studies may want to
analyze further leagues beyond the Premier League and Ligue 1 – including smaller markets (e.g., Switzerland, Belgium),
lower divisions, and amateur leagues.
Since our observation period is prior to the full introduction of the UEFA Financial Fair Play, we can only predict potential
implications of the regulation. The effectiveness of UEFA Financial Fair Play may be evaluated through a repetition of this
study once enough data have become available.

22
We thank an anonymous referee for this valuable contribution.
 M. Rohde, C. Breuer / Sport Management Review 21 (2018) 563–581 579

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