The impact of UEFA financial fair play on player expenditures, sporting success and financial performance: evidence from the Italian top league

Research question: In this study we empirically test the following hypotheses regarding the impact of financial fair play (FFP) on Italian first-division clubs: 1) FFP works as a governance mechanism moderating the relation between internal governance mechanisms and wage expenditures, 2) FFP is altering the relative importance of player expenditures as drivers of sporting performance, and 3) FFP is shifting the business model of Italian clubs leading to a more efficient decision-making on player transfers. Research methods: Using 165 club-year observations from 2007 to 2017, we jointly model the determinants of wage expenditures, sporting results and financial performance via a simultaneous equation approach. The impact of FFP is estimated by interacting a dummy variable for FFP with the key explanatory variables of each model. Results and findings: Empirical results show that FFP has 1) a negative effect on the relation between wages and sporting results, 2) a positive effect on the relation between net transfer fees and sporting results, and 3) a positive effect on the relation between gains on player trading and financial performance. Implications: Overall results suggest that FFP is altering the business model of Italian clubs from an investment-focused (wage spending) to a more efficiency-driven one that is geared to make gains from player trading. Accordingly, club managers should commit to creating sustainable cycles of player transfers in order to thrive under the new regulatory environment. As for regulators, this study supports the notion that FFP restores efficient managerial incentives in football businesses, reinforcing the case for a full implementation of the regulation.