The recent emergence of the Super League and the massive criticism it faced by the fans around the world was perhaps the most exciting topic football fans had to talk about in the past few years. The clubs joining the league were shamed by their own fans in public, forcing them to back down immediately, only with the exception of Barcelona and Real Madrid. So the future of the proclaimed Giant's league is uncertain so far. For now.
But this shocking relevance by the football teams indicated two things. The clubs involved were looking for more money to fix the holes left by the pandemic situation. And, secondly, it is getting hard for the clubs to buy top-class players in the post-inflation market made by the Neymar transfer, making them look for an alternative league that can pay the massive prizemoney for just participating in the league. This race for buying top-class players to boost the team performance on the field is where debt financing steps in.
From the study published in 2020 by Edward Robinson from the University of Derby named '' Gambling with Debt: The English Premier League'', we have found out why the clubs in EPL tend to depend on debt-financing rather than using their revenue generated finance to improve the club structure.
'Regularly in EPL, debt financing is used for human capital investments, as this is related to higher team performance.'' is what Edward Robinson stated, indicating its massive popularity among the club managements for boosting their long-term gains for the future.
Even if the revenues generated by the clubs in the EPL have seen massive growth over the years before the pandemic situation, the capital structures of the clubs have heavily favored debt from equity.
Taking in more debts means that the club can bring in some high-quality players in their team, increasing their performance on the pitch, which eventually increases the excitement factor as more competition grows between the teams in the league. This increasing competition sees a growth in the number of audiences and revenues generated from their presence. They described a 'David versus Goliath' effect, whereby fans are attracted to games if their teams have low winning probabilities. Hence, with increased competition, fans become win-optimistic, drawing larger audiences.
EPL clubs typically choose debt, which could potentially be because of debt's traditional benefits over equity, like being a cheaper source of financing, especially for smaller clubs.
Short-run win maximization is perceived as a route to obtain higher profits in the long run. This is because financial success in football is based on short-run results, as it is a 'zero-sum game', whereby league position can decrease, regardless of how well team performances are in 'absolute terms'. Therefore, if aiming for other short-run objectives, this could cause relegation, destroying future profit opportunities. Hence why owners use short-run debt as short-run equity is often unavailable to produce these short-run results.
But there can be huge drawbacks to the process. Borrowing for short-run win-maximisation, to achieve desires to 'maximise global, long-term returns', should conclude in short-run debt being settled. However, when team-success does not follow debt increases, wages and transfer fees increase above revenue, therefore, clubs have no choice but to continue borrowing.
This is exactly what happened in the case of Leeds United whereby a debt investment of a £60 million, 25-year corporate bond, securitised against gate revenues in 1999 was made to achieve short-run win maximisation. However, team-success did not follow, but remaining high expectations caused continuation of chasing the results on the pitch and taking more debts, resulting in wage costs quadrupling after 1999 and gearing ratios becoming more significantly high at 98.34%. Therefore, this 'debt-gamble' resulted in significant losses for Leeds United, concluding in a winding-up order from its debtor.
But even if it can be a risky venture because of the game's unpredictability, increased investment into human capital buys success on the field. This is because player wages 'systematically reflect' player skills and performances.
Although debt-fueled, borrowing for short-run win maximization should create a long-run financial performance. This exists because improved performances attract spectators, increasing income from matchday revenue, broadcasting rights, commercial sponsorships, and merchandising.
International competitions are also considered a main factor in increasing these revenue streams, as increasing talent means teams become more likely to attend remunerative European competitions, hence the term, 'Superstar' wage effect.
-source: ''Gambling with Debt: The English Premier League'' by Edward Robinson
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