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Expected Returns on Real Investments: Evidence from the Film Industry

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  • Thomas Y. Powers

Abstract

Asset pricers generally study the pricing of secondary market securities. Using a proprietary, project-level dataset on the film industry, I am able to study a cross-section of expected returns on real investments instead. One area in which we might expect differences is in the pricing of idiosyncratic risk. I find that expected returns are both increasing and concave in the idiosyncratic dollar variance of a film's payoff. Plotting expected returns against dollar volatility yields an approximately linear relationship, in which a $1 MM increase in volatility raises expected return by at least 43 basis points, up to as much as 116 basis points depending on the specification. I discuss several theories from corporate finance that can rationalize the pricing of idiosyncratic risk, and I build a matching model between studios and films in which costly external finance can explain both facts.

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  • Thomas Y. Powers, 2014. "Expected Returns on Real Investments: Evidence from the Film Industry," Working Paper 176011, Harvard University OpenScholar.
    • Handle: RePEc:qsh:wpaper:176011
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    File URL: http://scholar.harvard.edu/tpowers/node/176011
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