S. Abraham Ravid
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.
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