Modelling Probability of Default for European Football Clubs

Martin Amarquaye Quarcoo & Daniel Yderholm Larsen

Student thesis: Master thesis

Abstract

European football clubs are operating under special financial conditions, leading several clubs into financial distress. Financial distress has led to development of different bankruptcy prediction models to forecast the likelihood of bankruptcy based on financial ratios. These prediction models are primarily based on specific industry samples why it remains a challenge to predict the likelihood of bankruptcy in other settings. However, a specific model that captures the special characteristics of the European football industry has not yet been estimated.
Behind this lies the motivation of the present thesis, which purpose is to examine how the financial conditions of the European football industry affects prominent bankruptcy models and furthermore estimate a probability of default model for European football clubs, based on public available information. In order to assess these questions, financial ratios from 164 European football clubs, between 2010-2019 were included to estimate a probability of default model. The thesis shows special characteristics of the economic conditions in the industry and reveals that these affect the prediction of classification accuracy of existing bankruptcy models negatively.
The thesis subsequently proposes models for modelling financial risk-drivers of the probability of default for European football clubs, where it concludes that financial risk-drivers predict probability of default at a satisfactory level. The estimated probability of default model significantly outperforms prominent bankruptcy models in classifying clubs as distressed or surviving. However, the thesis' estimated bankruptcy prediction model cannot be generalized to all football clubs. Following the findings, appropriate non-financial variables that capture the distinct characteristics of the European football industry are discussed as potential variables in future estimation of probability of default models for European football clubs. Lastly, the present thesis discusses the effect of macroeconomic factors on the assessment of creditworthiness on football clubs, which concludes due to the aftermaths of the global financial crisis in 2007-2009, that football clubs are not affected to the same degree as companies in other industries. However, in light of the current COVID-19 pandemic, this paper discusses the implications of a global health crisis, and how it affects the European football industry.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final ThesisMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2020
Number of pages111