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Adverse Selection and Moral Hazard in Equity Partnerships: Evidence from Hollywood's Slate Financing Agreements
Author(s) -
Opitz Christian,
Hofmann Kay H.
Publication year - 2014
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/jems.12069
Subject(s) - hollywood , moral hazard , adverse selection , yield (engineering) , equity (law) , film industry , finance , quality (philosophy) , selection (genetic algorithm) , principal (computer security) , business , economics , movie theater , market economy , incentive , political science , law , art , philosophy , materials science , epistemology , artificial intelligence , computer science , metallurgy , operating system , art history
We use a movie industry project‐by‐project data set to analyze the principal–agent problem in slate financing arrangements. Under this specific film financing regime, which has become a significant mode of raising capital in Hollywood over the past decade, an external investor concludes a long‐term contract with a film producer and commits to cofinance a larger number of future film projects of that particular partner. In line with our theoretical conjectures, slate cofinanced movies receive poorer quality ratings and yield considerably lower return rates. Our data suggests that a substantial part of these performance differences may be attributed to adverse project selection and producer moral hazard.