One specific way in which firms can make use of financial markets is to list the firm on a public exchange, allowing many types of investors the opportunity to purchase a share of the ownership of the firm, and permitting the firm to source capital at the lowest available cost for investment in productive projects. Firms undertake this change in ownership from a private, entrepreneur-driven entity to a public firm via an Initial Public Offering (IPO).
This route from private to public ownership is a common and standard path for firms but rather rare in the case of football clubs. For example, the first football club to undertake an IPO was Tottenham Hotspur in 1983. In 2010 only 27 European football clubs were publicly listed.
So why do football clubs go public and what effect does a stock market listing have on the “on pitch” performance and on the value (stock price) of the club?
Why do football clubs go public?
There are two motives of sports team owners to go public (see Kesenne, 2008): owners can be profit-maximisers (i.e. run the club to maximise returns to its owners) or win-maximisers (i.e. run the club to maximise success for a given level of profits or losses). The differing motives imply a different use of the funds raised through an IPO.
Win-maximisers are more likely to use funds for investment in productive assets (players or stadia), whereas profit-maximisers are more likely to use funds to financially restructure the firm (e.g. reduce the level of debt). The latter point is also related to a greater discipline in terms of investments imposed by financial markets, which should lead owners to behave in a more profit-maximising fashion. Manchester United is a good example for such behaviour. The club is planning to use the money raised from its 2012 public offering to pay down its debt and not use the proceeds from the sale of shares to buy new players.
An empirical analysis of the “on-pitch” performance before and after an IPO can identify whether the football club followed a win- or a profit-maximising strategy. If the performance improves after an IPO in comparison to other football clubs in the domestic or international league, it is likely that the funds were partially used for new and more skilled players. If the performance does not change or worsens, the funds were primarily used for balance sheet consolidation (e.g. pay down debt).
Effects of going public?
Two effects can be analyzed. First, does a stock market listing and the raised capital increase the “on pitch” performance and second, does the listing increase the (stock market) value of the club? In other words, is the public listing good news for fans who want their team to win titles and good news for investors?
“On pitch” performance
An empirical analysis of “on pitch” performance, i.e. points per game, before and after a stock market listing reveals that football clubs do not benefit from a stock market listing in general. On average, clubs increased their points per game from 1.77 to 1.82 points after the listing. In a season of 30 games this implies one additional draw per football club compared to a loss in previous seasons. However, a more detailed analysis shows that most clubs perform worse after the IPO than before. Only lower division clubs, especially in larger leagues benefit in the home league from a listing. At the international level (e.g. UEFA Champions League) an IPO does not lead to an improved “on pitch” performance neither for lower nor for higher division clubs.
The results suggest that raised funds are primarily used for balance sheet consolidation and not for increased investments in players and stadia, consistent with the greater financial discipline imposed by public markets. An alternative explanation is that funds raised are not sufficient to ensure improved long-term performance. The fact that lower division clubs primarily benefit from a listing is consistent with this argument. It is likely that the marginal effect of funds raised through an IPO is larger for clubs which play in lower divisions than in the top division as salaries for players and revenues are significantly higher in top divisions.
Stock exchange performance
A comparison of the aggregate stock market valuations of all listed football clubs (STOXX football index) and the number of listed clubs through time illustrates that stock market valuations precede increasing number of IPOs of football clubs. This temporal relationship suggests that the decision of the owners of a club to go public depends on the current valuation of football stocks. If football clubs go public if valuations are relatively high subsequent poor financial and “on-pitch” performance is a consequence.
Furthermore, despite the fact that the football index was higher at the end of 2010 compared to the initial index levels, a comparison with a European stock index comprising major Eurozone firms shows that football stocks are clearly outperformed by the (broader) stock index in that period.
Conclusions
The majority of football clubs do not perform better in domestic and international competition after the IPO than before. Only football clubs in lower divisions clearly benefit from a stock market listing in the domestic league. Similarly, the stock market performance of football clubs is generally poor and football stocks are outperformed by broader stock indices.
Thus, the benefits of going public are very limited both “on pitch” and “on exchange”.
However, the stock market listing can have other beneficial effects. For example, it can lead to increased financial discipline with gains accruing in the longer term. Moreover, the listing might have helped the club to avoid bankruptcy or the sale of important players.
References
Baur, Dirk G. and Conor McKeating (2011). ‘Do Football Clubs benefit from Initial Public Offerings?‘, International Journal of Sports Finance 6(1), 40-59.
Kesenne, S. (2008), The Economic Theory of Professional Team Sports, Edwin Elgar Publishing