Somebody Knows Something: Managerial Ability, Product Development, and Return‐on‐Investment in a Hit‐Driven Industry

ABSTRACT In hit‐driven industries, product development is associated with a right‐skewed unconditional distribution of performance, and products in the right tail have outsized impacts. Understanding how exceptional performance is generated can improve resource allocation, but the literature advances two different narratives: one emphasizes postrelease demand discovery, and the other emphasizes prerelease factors, including project quality, management teams, and uncertainties associated with product development. The model in this paper facilitates assessing the relative importance of the different narratives. Estimation employs data on movies—the primary setting where demand discovery has been emphasized. The results reject the primacy of demand discovery; most project‐specific variation in return‐on‐investment is associated with uncertainty resolved during product development. Higher managerial ability is associated with better product‐development performance. Parameter estimates are compatible with nearly efficient and approximately positive assortative matching of projects and managers. The results suggest that emphasizing prerelease factors should be the presumptive narrative in all hit‐driven industries.