Cofinancing to Manage Risk in the Motion Picture Industry

Cofinancing is a term used in the movie industry to describe films for which multiple firms share the cost of production and revenues. We find that one-third of movies produced by major studios between 1987 and 2000 are cofinanced. Anecdotal evidence strongly indicates that cofinancing is for the purpose of risk management. However, the major studios are publicly traded firms, which allows investors to make their own diversification decisions, leading us to question the importance of cofinancing for risk management. Contrary to industry claims, we find that cofinancing decisions are unrelated to the distribution of individual movie returns-studios do not appear to cofinance relatively risky films. But we do find that studios are more likely to cofinance movies that account for a large fraction of their total annual production budget, which reduces portfolio risk via the law of large numbers. Toward an alternative explanation for cofinancing, we also find that cofinancing between two major studios impacts the release dates of their other movies. Copyright Blackwell Publishing 2005.