Events

“Turnover maximization, Sports Competitive Pressure, Emotional Attachment and Soft Budget Constraints: The Peculiar Logic of Professional Team-Sports”

The Business of Sport – Seminar Series

Room G01 – Clore Management Centre, Birkbeck College, Torrington Square, London WC1 7HX

Wednesday 7 May 2008 at 6pm
(For directions click here)

“Turnover maximization, Sports Competitive Pressure, Emotional Attachment and Soft Budget Constraints: The Peculiar Logic of Professional Team-Sports”

Given by:

Professor Klaus Nielsen

Synopsis:

The profit maximization hypothesis is a core assumption in mainstream economics. However, few scholars assume that profit maximization is an adequate description of what is actually going on in the typical firm, and auxiliary hypotheses or alternative explanations are deemed necessary to explain actual firm behaviour. This being the case when analysing economic activities on a ‘normal’ market, the failures of the theoretical framework only get bigger when deploying it on sports. Sports business is characterized by specific features that sets it apart from what mainstream economic theory was originally set up to deal with. The economic behaviour of the typical team-sports business is irrational when judged from the normative perspective of the profit maximization hypothesis. The purpose of this seminar is to review new empirical evidence and to discuss possible explanations of the seemingly ‘irrational’ behaviour of professional team sports clubs.

The seminar is based on a paper co-authored with Rasmus Storm (Danish Centre for Sports Studies). The paper is structured as follows: In the first part of the paper, after a brief review of data on European professional football clubs, new data on the economics of Danish football and team handball are presented in more detail. We conclude that the specific institutional context of team-sports business in Denmark and in most other European countries favours optimisation of winning percent rather than optimisation of profit margins. Apart from a few exceptions, professional team-sports clubs operate with a primary goal of winning, subject to budget constraints around break-even or often deficits. Turnover maximization is suggested as an alternative genera hypothesis concerning the economic behaviour of professional team-sports clubs. In the second part, we provide possible explanations regarding this particular behaviour. Sports competitive pressure in an institutional context, that provides major gains from winning and major losses from failing, stimulates risky, high spending behaviour. Small investors are to a significant degree emotionally attached to the sporting success of their clubs and only marginally motivated by financial gain. For large investors emotional attachment is also important, and goodwill and asset gains often substitute profits as goals. These mechanisms combined with the willingness of other stakeholders to contribute resources and provide solutions in case of financial troubles, make budget constraints soft. To some extent, the typical professional team-sports club behaves similarly to firms in a planned economy with privileged access to central resources. As these findings challenge mainstream economic theory, we conclude with propositions and research questions for further research into the peculiar logic of professional team-sports in order to develop a proper theoretical framework.

Reading:

  • K. Nielsen and R. Storm (2008): “Turnover maximization, Sports Competitive Pressure, Emotional Attachment and Soft Budget Constraints: The Peculiar Logic of Professional Team-Sports”. Working Paper. Available form Monday the 28th of April.

Biographies:

  • Klaus Nielsen is Professor of Institutional Economics at the Department of Management, Birkbeck, University of London.
  • Rasmus Storm is Research Director at the Danish Centre for Sports Studies.

For further details on this Seminar Series contact:

Sean Hamil
Department of Management
Birkbeck College
Malet Street
London
WC1E 7HX

Email: s.hamil@bbk.ac.uk or Tel: 020-7631 6763

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