Information, Blockbusters and Stars? A Study of the Film Industry

Abstract

The purpose of this paper is to explore the role of stars and other potential informational signals in the movie business. In the first part of the paper, we explore two alternative economic explanations for the role of stars in motion pictures. The first approach is a signaling view; namely that informed insiders signal project quality by selecting an expensive star. The second approach is the 'rent capture' hypothesis, i.e. that stars receive their marginal value. These two approaches have different implications regarding stars' pay, movie revenues and return on investment. The second part of the paper contains an extensive empirical investigation of a sample of movies produced in the 90's. Univariate analysis seems to show that star-studded films bring in more revenues than other films. However, regression analysis only supports the notion that any big budget investment increases revenues. Sequels, highly visible films and 'family oriented' ratings also contribute to revenues. However, when we measure return on investment, we find that stars or big budgets are not associated with profits; if anything, low budget films seem to do better. This supports again, the 'rent capture' hypothesis. We identify some additional variables that are associated with profitable films.