Question

A group of investors bought property and developed a movie production studio. After a few years in business, the state passed regulations limiting the amount of tax incentives it would offer film studios shooting movies in the state. This move caused several companies to move their shooting to other states, jeopardizing the investors' ability to earn the return they were expecting. What type of risk is this?

Answer 1

Regulatory risk arises from changes in laws and government policies that can negatively impact business operations, and it's the type of risk faced by investors when the state limited tax incentives for movie studios, causing companies to relocate.

Step-by-step explanation:

The type of risk described in the scenario, where a state passes regulations that limit tax incentives for movie studios, is known as regulatory risk. This type of risk arises from changes in laws, regulations, or government policies that can adversely affect the business operations, profitability, or assets of a company. When other states offer better incentives, and a company moves its operations to benefit from them, it's also indicative of geographic capital movement and competition between states in terms of financial attractiveness for businesses.

Investors in industries such as film production are affected by a variation of regulatory risks, including those stemming from changes in environmental regulations, taxes, subsidies, and other governmental actions.