Dr. P.V. Viswanath

pviswanath@pace.edu

Outside equity control in film financing

Fee, Edward. “The costs of outside equity control: Evidence from motion picture financing,” Journal of Business, Oct. 2002, vol. 75, n. 4, pp. 681 ff.

Benefits of large outside shareholders (venture capitalists):

• outside monitoring
• outside expertise.

Costs of large outside block stockholders:

• Opportunistic behavior by outside equity that inhibits certain positive actions that would otherwise have been taken by the entrepreneur
• reduced stock liquidity.

Questions discussed in the article:

1. Why are mass media companies and professional sports clubs predominantly held by management? (see p. 683)
2. What are the advantages of having film studios are providers of finance (in addition to distribution of films)?
3. What are the advantages of independent financing (i.e. non-studio financing)?
4. Is there an interactive effect between financing and distribution?  In other words, are financing and distributing independent activities, or is there some connection between them that would make it desirable for the person distributing and financing a film to be the same?  Or, conversely that the person distributing the film not be the same as the person financing the film?
5. How might outside financing affect the quality and nature of a film?
6. What is the role of incomplete contracting in the financing of a film?  In other words, in practice, one cannot put everything into a contract because many aspects of a business will necessary have to be determined on the basis on what might happen in the future.  How does this affect film financing?
7. What is the role of a completion guarantor?  How might this affect the likelihood of outside financing for a film? (p. 689)
8. Why aren’t studios who also act as financiers for a film willing to give up control rights in the production of that film?
9. What do you think of the idea that the kind of financing used in a film is due to its size?  That is, films that require a larger budget would be financed by studios which have access to larger financial resources, while smaller films would be produced independently.
10. Is there a connection between film financing and directors’ reputation?  In other words, would established directors choose studio financing consistently?  Or vice-versa?  What might be the basis for such a connection if one does exist?