Information leakage in the football transfer market

Abstract

ABSTRACT Research question: Previous studies have examined the impact of various sports-related events on the stock exchange; however, the impact of information leakage about players’ transfer on the stock price of football clubs is yet to be explored. This study seeks to bridge the gap by investigating whether abnormal returns occur at well-known European football clubs before the announcement of the transfer. Research method: Using an event study methodology, the effect of 272 player purchases between 2015 and 2019 were analysed. The abnormal returns were estimated by applying a partial adjustment model containing the autoregressive conditional heteroscedasticity specification; then, the typical runs of cumulative abnormal returns were identified. Results and findings: In the vast majority of cases, the stock reacted to the announcement; moreover, in two-thirds of the transactions, information leakage was also established. Because the small shareholders of football clubs are, presumably, emotional investors, rather than rational ones, most of the transfers affect share prices even before the announcement; this is potentially because the acquisition of a star player strengthens both their commitment to the club and belief in its sporting success. Implications: This study provides some managerial implications for football club owners, managers, and regulators. Although there is information leakage, it is not of such a magnitude as to require the regulation of the stock market and bulk trading. It can be stated that investors were most likely to receive extra profit as a reward for their committed supporter attitude, and this is by no means a market failure.