The role of video game quality in financial markets

Abstract: Product quality is an often-overlooked factor in the financial analysis of video games. Quality measurements have been proven to work as a reliable predictor of sales while also directly influencing performance in financial markets. If markets are efficient in reflecting new information, perception of video game quality will lead to a rational response. This thesis examines the market reaction to this information set. The release structure in the video game industry allows for a direct observation of the isolated quality effect through third-party reviews. These reviews form an objective measurement of game quality without having other revealing characteristics, as all other information is released prior to these reviews. The possibility to exploit this unique case motivates the analysis through multiple empirical designs. Results from a multivariate regression model show a statistically significant positive effect of higher quality on short-term returns over all models. The release of a lower quality game reduces returns only for high-profile games. Both of these results are confirmed by the results from a rules-based trading strategy. These effects subside in the face of longer holding periods and higher exposure. This thesis finds sufficient evidence that video game quality should be an important factor in the analysis of video game companies. At the same time, these effects are only persistent in the short-time validating an efficient response to new information by financial investors.