Despite an explosion of content competing for our attention, Hollywood retains a powerful grip on global popular imagination.
Big name film stars set trends with their fashion choices whilst merchandise sales tied to the biggest blockbusters – Star Wars is a prime example – can be worth hundreds of millions of dollars.
But cinema’s emotional power also holds sway over other aspects of our lives, sometimes in unexpected and surprising ways. In a research study with colleagues at NUS Business School and Renmin University in China, we found that the emotional impact of movies also has a significant influence on stock price returns.
Several academic studies have revealed a range of factors that influence investor sentiment and hence drive stock returns. High profile disasters such as air crashes or terrorist attacks for example, depress investor sentiment and therefore lead to lower stock returns.
Likewise lack of sunshine or poor air quality caused by pollution have both been linked to depressed returns, while another study found stock returns are affected by lunar phases. Stock returns have also been found to have predictable patterns around social events such as national holidays and religious festivals, with high returns preceding these days, probably due to the positive boost they give to investor sentiment.
Rational actors
Indeed investor sentiment has been shown to have a close association with stock fluctuations, calling into question the classical economic view that sees investors as rational actors and stock prices as random and unpredictable.
In the field of behavioural research, several other academic studies have shown that movie exposure can alter audience behaviour. For example, one study by researchers at the University of California found that larger audiences for violent movies was associated with a same day reduction in violent crimes.
What intrigued us was whether movie sentiment, demonstrated by a film’s box office takings, has a similar effect on investor behaviour.
Using data from daily stock trades and movie websites Box Office Mojo and Rotten Tomatoes over a 12 year period we found that high box office takings for action-adventure movies leads to a two-basis-point rise in next-day stock market return.
We also found that certain types of stocks – those that are small-scale, young, volatile, unprofitable, non-dividend paying, or that see extreme growth – are more susceptible to the effects of movie sentiment. This is because individuals drawn to more speculative investments, and who tend to have their mood elevated by exposure to action-adventure movies, inherently prefer to deal in these kind of stocks.
High ratings
Moreover our study showed the effect on stock returns was especially pronounced when movies with strong reviews from film critics and with higher audience ratings are being shown.
For our research we looked in particular at the impact of action-adventure movies, as psychological studies have shown that this genre of film provokes the most intense emotional reaction – a state most likely to drive investors to more risk-taking behaviour. The action-adventure genre is also by far the most popular, accounting for more than half of the top 50 highest grossing films of all time in the US.
From the data we gathered in our study, we found that a high box office for these types of films lead to a greater investor propensity to speculate, in turn fuelling an overvaluation of stocks reflected by an increase in stock returns.
This reflects the fact that among the various movie genres including romances, comedies and dramas, action-adventure films are conceptually the kind most closely related to issues of risk and uncertainty.
Our study also showed that the impact of movie sentiment on stock returns intensified on days approaching weekends, and was noticeably weaker on days immediately after. This suggests that movie sentiment amplifies a day-of-the-week effect on stock returns found by other studies.
These findings are significant because they show that movie sentiment is a significant factor, among several others, in predicting stock returns because of their impact on investor moods.
This also adds to growing evidence from the fields of psychology and behavioural finance that contradict the assumptions of traditional asset pricing theory that investors are perfectly rational.
Instead our study supports the case that investors are subject to behavioural biases – shaped by their moods – which drive their decisions away from what economists would regard as the most optimal and rational choices.
This mood variability is what shapes investors’ views – whether right or wrong – about investment risks and future cash flows, in turn leading to overvaluation or undervaluation of stock returns.
From our study we found clear evidence to identify action-adventure movies as a source of investor sentiment, with movie quality – determined by professional critic reviews and audience ratings – being a major determinant of its impact.
Ultimately our findings reveal that the impact of a night at the cinema can be about more than just a couple of hours of escapism in the company of a box of popcorn and, if we’re lucky, a significant other.
It can also play a significant role in shaping our financial fortunes too.