Powers, Thomas2015-07-272014Powers, Thomas Y. 2014. Expected Returns on Real Investments: Evidence from the Film Industry. Working Paper, Harvard University.http://nrs.harvard.edu/urn-3:HUL.InstRepos:17692595Asset pricers generally study the pricing of secondary market securities. Using a proprietary, project-level dataset on the film industry, I am able to study a cross-section of expected returns on real investments instead. One area in which we might expect differences is in the pricing of idiosyncratic risk. I find that expected returns are both increasing and concave in the idiosyncratic dollar variance of a film's payoff. Plotting expected returns against dollar volatility yields an approximately linear relationship, in which a $1 MM increase in volatility raises expected return by at least 43 basis points, up to as much as 116 basis points depending on the specification. I discuss several theories from corporate finance that can rationalize the pricing of idiosyncratic risk, and I build a matching model between studios and films in which costly external finance can explain both facts.en-UScross-sectional asset pricingpricing real investmentsproject choicemanagerial risk aversionrisk managementResearch Paper or Report2014-06-272016-07-01