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Real Options in the Motion Picture Industry: Evidence from Film Marketing and Sequels

56 Pages Posted: 29 May 2011 Last revised: 16 Dec 2011

James Jianxin Gong

California State University at Fullerton

S. Mark Young

University of Southern California - Leventhal School of Accounting

Wim A. Van der Stede

London School of Economics & Political Science (LSE)

Date Written: October 18, 2010

Abstract

We examine the application of real options within two contexts of motion picture investment decisions by studio executives. The first is whether to continue marketing a film following its initial release in theaters (an abandonment option). The second centers on the decision to produce a sequel to an original film (a growth option). Few accounting studies have examined the use of real options but they are of considerable importance to companies managing risk through their cost structure and capital investment decisions. Specifically, a real option allows decision makers to postpone further expenditure commitment until a substantial portion of the uncertainty surrounding the investment has been resolved. Our evidence from the motion picture industry indicates that studios leave a portion of their marketing budget uncommitted until its spending is warranted. We also show that studios invest more in original films that they believe will lead to a sequel. Specifically, we find that studios spend higher production and marketing costs on films with sequels than those without, and that sequels generate higher returns on investment than non-sequels. Overall, our results suggest that the real options framework has applications for accounting research and practice by providing a basis for studying and understanding cost commitments in product or project-based settings.

Keywords: Real options, investment decisions, cost behavior, motion picture industry

JEL Classification: C12, D21, D81, L82, M0

Suggested Citation

Gong, James Jianxin and Young, S. Mark and Van der Stede, Wim A., Real Options in the Motion Picture Industry: Evidence from Film Marketing and Sequels (October 18, 2010). Contemporary Accounting Research, Vol. 28, No. 5, pp. 1438-1466, Winter 2011. Available at SSRN: https://ssrn.com/abstract=921364

Jianxin Gong (Contact Author)

California State University at Fullerton ( email )

Department of Accounting
Mihaylo College of Business and Economics
Fullerton, CA 92831
United States
(657)278-3897 (Phone)
(657)278-4518 (Fax)

S. Mark Young

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-4848 (Phone)
213-747-2815 (Fax)

Wim A. Van der Stede

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 7955 7420 (Fax)

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