Movie Advertising and the Stock Market Valuation of Studios

Major studios typically launch fewer than twenty motion pictures per year, so the financial performance of a single movie release can have a major effect on the studio’s profitability. The Efficient Capital Markets hypothesis posits that the stock market would recognize such an impact. In this paper we study how single movie releases impact the investor valuation of the distributor. We analyze the change in post-launch stock price of a movie, and predict the direction and magnitude of excess returns based on the expectation built up for that movie. That expectation is set, in part, by media support, i.e. highly advertised movies are expected to draw larger audiences than others. By using an event study methodology, we isolate the impact of a movie launch on studio stock price, and track the determinants of that change. We examine a comprehensive dataset from 1995-1998 comprising over 300 movies released by the largest studios, including variables such as their media expenditures, production budget, MPAA ratings, opening and total gross revenues, critical ratings, number of screens at opening and beta excess stock return. Our results indicate that there exists a clear interaction between the marketing support received by a movie and the direction and magnitude of its excess stock return post launch. Movies with above-average advertising have lower post-launch stock returns than films with below-average advertising. Our findings also suggest that movies that are hits at the box office may result in a lowering of stock price if they had high media support, on account of high expectations build-up prior to launch. Thus pre-launch advertising plays a dual role of informing consumers about a movie’s arrival as well as helping investors form expectations about the studio’s profit performance.