Information Cascades among Investors in Equity Crowdfunding

Abstract

Finance studies on information cascades, usually in an initial public offering setting, typically differentiate between institutional and retail investors, as this is the only information available to potential backers. Information available through equity crowdfunding platforms includes details on individual investors as they may disclose information about themselves by linking their profile to social networks or websites. Using a sample of 132 equity offerings on Crowdcube in 2014, we show that information cascades among individual investors play a crucial role in crowdfunding campaigns. Investors with a public profile increase the appeal of the offer among early investors, who in turn attract late investors.

Which updates during an equity crowdfunding campaign increase crowd participation?

“…Therefore, start-ups and crowdfunding portals typically also communicate these updates in their social media channels or via newsletters to increase investors' awareness of the update. Furthermore, posting an update has typically no immediate effect on crowd participation because investors' need some time to learn about the update and to pledge their money (Wheat et al 2013;Mollick 2014;Kromidha and Robson 2016;Vismara 2016b). Hence, the visibility of updates and their effect on crowd participation is likely to be delayed by a few days.…”

“…For this purpose, we used the software package MaxQDA, which allowed us to analyze qualitative data. In a first step, we generated an initial list of update categories based on our prior knowledge and previous research on investment decisions in equity crowdfunding (Hornuf and Schwienbacher 2015;Vismara 2016aVismara , 2016b. During the coding process, we expanded this initial coding system by using an iterative and inductive process to cover all relevant information provided by the updates (Miles and Huberman 1994).…”

“…Following prior research on funding dynamics in equity crowdfunding (Hornuf and Schwienbacher 2015;Vismara 2016b), we included several control variables in our baseline regression. To account for campaign participation before the focal day, we control for the amount of capital raised during the crowdfunding campaign until the previous day (Ln(Amount) 0 → t −1 ).…”

“…Prior research has investigated the success drivers of equity crowdfunding campaigns and has shown that information provided by the start-up, such as the human and social capital of the founders, risks involved, and financial projections, have a positive influence on campaign success (Ahlers et al 2015;Vismara 2016b;Polzin et al 2017). This information usually does not change during a crowdfunding campaign and is typically provided by the start-up before a campaign starts.…”

“…We analyze how start-ups can use updates during the campaign to encourage the crowd to provide funding. This particular determinant of equity crowdfunding participation has been overlooked in the literature so far, and as such, there is an important gap on the effects of information disclosure on crowd participation (Ahlers et al 2015;Bernstein et al 2017;Vismara 2016b;Polzin et al 2017). Updates enable start-ups to signal their value to the crowd and to establish credibility and legitimacy during a crowdfunding campaign.…”