The dark side of the movie. The difficult balance between risk and return

This paper aims to analyse the risk and return trade‐off in the film industry, and to explain the managerial decisions justifying significant investments in such a risky and uncertain sector.

An extensive dataset of movies released in US theatres over a period of 12 years along with descriptive statistics, frequency analysis and scatter plot methodology are used.

The findings highlight: a positive relationship, although with high levels of variance, between production budgets and revenues; and a random association between costs and rates of return.

Differently from other commodities, whose demand can be quite accurately estimated, the success of a new film production is extremely uncertain. Therefore, the reason why major film companies have been successful over the last decades, in spite of the extreme variance that is characteristic of the industry, must be found in the management decision approach that they employ to deal with this uncertainty.

The paper uses statistical evidence to draw management implications, rather than only identifying the economic and financial behaviour of the firms running the film industry, in recognising that correct management decision approaches are behind the success of such an uncertain and volatile industry.