The Costs of Outside Equity Control: Evidence from Motion Picture Financing Decisions

Recent theoretical work suggests that outside investor control may have costs as well as benefits, particularly in small, entrepreneurial firms. The possibility of investor opportunism can reduce an entrepreneur's incentives to invest personal effort into the firm. I investigate this issue in the context of motion picture financing decisions. Filmmakers face the choice of using studio financing (and giving up control) or of obtaining independent financing (and retaining control). I find that independent financing is more common when a filmmaker's private artistic stake in a film is high and also for films requiring a relatively high level of creative effort.