Stefan has written his most recent research paper about insolvency and English football clubs. The link to the full paper is below. Between 1982 and 2010, there were 67 cases of insolvency affecting clubs in the top four English divisions. The paper considers two possible explanations for this phenomenon:
(i) irrational exuberance
(ii) negative shocks
Irrational exuberance here is taken to mean excessive spending which manifests itself in short term success (higher placings in the league) only to be followed by decline. Negative shocks refer to unexpected events (e.g. player injuries) which undermine a rational plan of action. The evidence shows, perhaps surprising, that there is little evidence of irrational exuberance. Before becoming insolvent, most clubs appear to have been in decline for a period of several years. Negative shocks, however, are significantly correlated with subsequent financial collapse (insolvency).
This is an important issue in the light of UEFA’s Financial Fair Play, and similar schemes such as the one announced by the Football League Championship. These aim to “introduce more discipline and rationality in club football finances” through regulation. One way this could be achieved would be if irrational exuberance caused financial failure and regulation could restrain such exuberance.
In reality, however, the bigger problem seems to be negative shocks and it is much harder to see how the regulators can control them. This is similar to the problems that governments face when trying to keep the economy on course. A large fraction of economic failures are triggered by recessions, which themselves are due to negative shocks (such as banking failures or oil price increases). If government could regulate away negative shocks, we would all be a lot better off. It remains to be seen if the football authorities can shield football clubs from negative shocks. Do not bet on it.