Member Stability as a Signal of New Product Quality: An Example of Financing Decision of Hollywood’s Sequel Movies

[[abstract]]Movie industry is an example of a typical “experience product” market. The pre-consumption quality of such a product is difficult to assess without actually viewing the movie. In distinguishing between sellers of high- and low-quality products before consumption, consumers in such markets look for credible information about products and sellers that firms can provide using “signals” to assess the new product quality. It also can mitigate consumers to exposure to risk and uncertainty. Especially for motion picture industry, nearly all financing decisions are made before films are produced. Thus, team members in the film production are the important sources to be signals to assess the film quality. We investigate what factors are influenced in making financing decision and take key roles in Hollywood filmmaking as signals. In particular, we focus on the effect of member stability between sequel and original movie. Members’ reputation and box -office success derived from past observation are important in contexts characterized by imperfect information, in which studio and production can rely on proxies or signals to make rational assumption about the intention and future behaviors of members. From the consideration, we develop five hypotheses arguing that the positive relation between stabilities of significant roles in filmmaking and motion picture finances. We use data on 128 sequels presented in America in the period 2002-2007 for our empirical analysis. The results are that producer and actor stabilities between sequel and original movie have positive relation to finances. But it is negative relation between movie star stability and film finances.