The Consequences of Accounting-Based Regulation: Real Effects on European Football Players Transfer Market

Abstract

We investigate the effects of the Financial Fair Play (FFP) regulation, which requires clubs participating in European football1 competitions to comply with the break-even rule. The break-even rule is a strict earnings-based threshold that treats gain from sale of club productive assets—the contracts of football players—similar to operating profits for the purpose of compliance. We find the overall volume of transfers of players as well as the volume of transfers of young players both increased following the regulation, with stronger effects in clubs subject to the regulation. We also find the average club gains recorded on players’ transfers increased significantly following FFP for clubs subject to the regulation, and that these gains directly link to incentives to beat the break-even threshold. Finally, we find that following FFP clubs use exchange transfers—where no cash is involved—to inflate transfer fees to comply with the break-even rule. Overall, we provide evidence on the potential externalities of accounting-based regulation, which likely has broader implications for using accounting quantities in policy-making.

Keywords: Accounting Regulation; Earnings Management; Accounting and Real Effects; Regulation in Sports.

JEL Classification: A11, G18, G38, L51, M41, M48, Z22