13-RajDup-USA - Project Returns from Investment Decisions:...

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Project Returns from Investment Decisions: Evidence from Biopics Wayne J. McMullen * , Raj Varma ** Managers can make investment decisions to maximize firm value or profits by choosing projects with competitive advantage. Alternatively, managers can choose projects that enhance private benefits such as prestige or job security from risk minimization. Our analysis of biopics projects in the movie industry indicates that these projects provide managers with substantial private benefits from prestige but not risk minimization. We also find that the ex- post returns from biopics are not significantly different from those from fictional projects. These results are consistent with a competitive equilibrium in which a meaningful determinant of project choice is the tradeoff between private benefits from prestige and commercial success. Field: Finance 1. Introduction Investment and financing policy decisions remain the two most important decisions made by financial managers. Whereas investment decisions are typically concerned with the kinds of projects in which a financial manager should invest the firm’s money, financial decisions involve the various ways in which the firm raises money for its projects. Although a considerable body of research has evolved on project-specific theories on investment and financing policy decisions, empirical evidence on these decisions remains understandably limited to the firm-level as data is typically only available at the aggregate-level for the entire portfolio of the firm’s projects. In this paper, we investigate examine project-specific empirical evidence on investment policy by looking at project choice in the movie industry. Specifically, we examine biopics, a particular kind of a movie project based on the life of an actual person and compare these to movie projects based fictional characters. Our motivation for examining investment decisions in the movie industry is that * Associate Professor, Pennsylvania State University, Brandywine Campus, Media, PA 19063, USA; Telephone: (610) 892-1426; E-mail : wjm11@psu.edu ** Professor, University of Delaware, Department of Finance, Newark, DE 19716, USA; Telephone: (302) 831-1786; E-mail : varma@udel.edu.
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we are able to obtain rich project-by-project data for both biopics as well as fictional movie projects. Our interest in the use of the movie industry as a useful laboratory for testing various theories in financial economics also follows recent trends in the increased attention of the movie industry by finance scholars. Fee (2002), for example, examines the choice of an entrepreneur to obtain project finance from a large outside investor and thus abandon control versus getting independent funds and maintain control. Fee investigates these trade-offs using the motion picture industry as a laboratory because “the institutional features of the motion picture industry closely resemble those modeled in the theoretical literature” (p. 682). Palia, Ravid and Reisel (2008) examine strategic alliances in
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13-RajDup-USA - Project Returns from Investment Decisions:...

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