The Use of Signals in New-Venture Financing: A Review and Research Agenda

Abstract

The use of signals to overcome information asymmetries and reduce the uncertainty inherent in resource acquisition has become a prominent theme in new-venture financing literature. In particular, the assessment of a wide range of different information signals, with the aim of conveying a venture’s quality and legitimacy to prospective investors, is receiving increased scholarly attention. With contributions from a broad spectrum of diverse research foci investigating interactions with distinct types of investors, the literature on entrepreneurial signaling in new-venture financing has become fragmented, and this is harming further development of the field. This study systematically reviews the different literature streams on entrepreneurial signaling to provide a more integrative framework, which can contribute to the cumulative and evidence-based body of knowledge about the role of entrepreneurial signaling in new-venture financing. Furthermore, the authors identify critical sender-, signal-, receiver-, and environment-related boundary conditions that influence the signaling effectiveness. In this way, the authors identify gaps in the existing literature and map directions for future research.

Access Denied: How Equity Crowdfunding Platforms Use Quality Signals to Select New Ventures

“…Receivers are outsiders who are supposed to react to signals, and they may differ in how they interpret and eventually react to signals. Signaling theory has been applied extensively to explain how investors such as venture capitalists, initial public offering (IPO) investors, and crowdfunders react to signals such as affiliations with partners, reputation, or top management team characteristics (e.g., Colombo, 2021). For investors, as signal receivers, the effectiveness of signals is moderated by environments, such as the industry of the new venture (Hsu, 2007) or the regulations in the new venture's country of origin (Bell et al, 2012).…”

Equity Crowdfunders’ Human Capital and Signal Set Formation: Evidence From Eye Tracking

“…Signaling theory has increased our understanding of when prospective investors choose to fund new ventures in an environment fraught with uncertainty and informational asymmetry (Baid & Allison, 2019;Bergh et al, 2014;Colombo, 2021;Connelly et al, 2011). Firms can ease resource attraction through signaling with their boards (Certo, 2003), team member characteristics (e.g., Plummer et al, 2016), early accomplishments (Hallen, 2008), and endorsement relationships (Anglin et al, 2020;Plummer et al, 2016;Stuart et al, 1999).…”

Talking about a revolution? Costly and costless signals and the role of innovativeness in equity crowdfunding

“…We argue that information about the company's future plans constitutes a costless signal (Colombo 2020) which has low value because it is a strategy available to both high-and lowquality firms (Connelly et al 2011). In contrast, patenting of a high-tech invention in the past is a valuable and difficult-to-imitate signal of firm quality (Pollock et al 2010).…”

“…The literature linking disclosure of public information and company returns (Karapandza 2016;Easley, and O'hara 2004;Amit, and Livnat 1988) shows that the announcement of future plans (e.g. stock repurchases) has positive repercussions for stock prices despite not constituting a firm commitment (Austen-Smith, and Banks 2000; Brennan, and Hughes 1991;Bhattacharya, and Krishnan 1999;Bhattacharya, and Jacobsen 2016;Colombo 2020).…”