Management Accounting Section Midyear Meeting

Why Do U.S. Films Underperform in China: Making Sense of Cents Abroad

• In Event: Contracting

Abstract

Revenue-sharing contracts are widely used in licensing agreements, especially in geographically dispersed markets. While this arrangement leverages the licensees’ local expertise, it also distances licensors from the market and subjects them to additional costs as they attempt to monitor and interpret reported performance. These costs are particularly high when reported revenues are lower than expected, as the licensor must determine whether underperformance is driven by economic factors, such as poor demand, or intentional misreporting by licensees. We examine these issues within the Chinese film exhibition industry. Using film-level box office data from 7,516 cinemas in 2016, we show that foreign films’ reported box office revenues are 17% lower than local films shown in the same cinema. We find that this relative underperformance is not attributable to low demand for foreign films. Rather, it is concentrated in cinemas where foreign producers face higher monitoring costs, suggesting that the underperformance is driven by cinema owners’ underreporting. Our results provide some of the first evidence of product-level misreporting under revenue-sharing contracts and suggest potential ways to mitigate misreporting. Further, the results indicate the importance of simultaneously considering economic and reporting factors when using reported revenue to assess performance under revenue-sharing contracts.

Authors

• Aner Zhou, California State University, San Marcos

• Eric J. Allen, University of California - Riverside

• Fei Du, University of Illinois at Urbana-Champaign

• Mark Young, University of Southern California