Movie Advertising and the Stock Market Valuation of Studios: A Case of Great Expectations?

Product innovation is the key revenue driver in the motion picture industry. Because major studios typically launch fewer than 20 movies per year, the financial performance of a single release can have a major effect on the studio's profitability. In this paper we study how single movie releases impact the investor valuation of the studio. We analyze the change in postlaunch stock price and predict the direction and magnitude of excess returns based on the revenue expectation built up for a movie release. 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 data set comprising over 300 movies released by the largest studios. Our results indicate 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 prelaunch advertising have lower postlaunch 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 because of high performance expectations built up prior to launch. Thus prelaunch 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.