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Quality revealing versus overstating in equity crowdfunding

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  • Johan, Sofia
  • Zhang, Yelin

Abstract

This paper studies the impact of qualitative business information on mitigating information asymmetry between equity crowdfunding entrepreneurs and investors. Qualitative business information covers the entrepreneurs' introduction on business model, competitive strategy, product market, drivers and barriers for product/service adoption and business milestones. Empirical data reveal that, overall, more detailed disclosure of qualitative business information leads to better fundraising outcome. However, while entrepreneurs' excessive use of promotional language, or self-praise on business quality without factual support, is not rewarded by sophisticated investors, ordinary investors are less resistant to promotional language. We also find that Title III of the JOBS Act results in a reduction of the percentage of completed fundraisings but exacerbates the effect of project description on the percentage of completed fundraisings.

Suggested Citation

  • Johan, Sofia & Zhang, Yelin, 2020. "Quality revealing versus overstating in equity crowdfunding," Journal of Corporate Finance, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:corfin:v:65:y:2020:i:c:s0929119920301851
    DOI: 10.1016/j.jcorpfin.2020.101741
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    7. Silvio Vismara, 2022. "Expanding corporate finance perspectives to equity crowdfunding," The Journal of Technology Transfer, Springer, vol. 47(6), pages 1629-1639, December.
    8. Sakshi Sharma & Kunjana Malik & Manmeet Kaur & Neha Saini, 2023. "Mapping research in the field of private equity: a bibliometric analysis," Management Review Quarterly, Springer, vol. 73(1), pages 61-89, February.
    9. Ciro Troise & Enrico Battisti & Michael Christofi & Nina Jorien Vulpen & Shlomo Tarba, 2023. "How Can SMEs Use Crowdfunding Platforms to Internationalize? The Role of Equity and Reward Crowdfunding," Management International Review, Springer, vol. 63(1), pages 117-159, February.
    10. Alice Rossi & Tom Vanacker & Silvio Vismara, 2023. "Unsuccessful Equity Crowdfunding Offerings and the Persistence in Equity Fundraising of Family Business Start-Ups," Entrepreneurship Theory and Practice, , vol. 47(4), pages 1327-1355, July.
    11. Lv, Jiancheng & Bi, Gongbing & Xu, Yang, 2023. "Crowdfunding pricing and quality overstatement in the presence of platform regulation," Journal of Retailing and Consumer Services, Elsevier, vol. 70(C).
    12. Cumming, Douglas J. & Johan, Sofia Atiqah & Reardon, Robert S., 2021. "Governance and success in U.S. equity crowdfunding," CFS Working Paper Series 668, Center for Financial Studies (CFS).
    13. Coakley, Jerry & Lazos, Aristogenis & Liñares-Zegarra, José M., 2022. "Seasoned equity crowdfunded offerings," Journal of Corporate Finance, Elsevier, vol. 77(C).
    14. Rama, Ali & Jiang, Chunxia & Johan, Sofia & Liu, Hong & Mai, Yong, 2022. "Religious and social narratives and crowdfunding success," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    15. Anglin, Aaron H. & Pidduck, Robert J., 2022. "Choose your words carefully: Harnessing the language of crowdfunding for success," Business Horizons, Elsevier, vol. 65(1), pages 43-58.
    16. Sofia Johan & Yelin Zhang, 2022. "Investors’ industry preference in equity crowdfunding," The Journal of Technology Transfer, Springer, vol. 47(6), pages 1737-1765, December.
    17. Lukkarinen, Anna & Schwienbacher, Armin, 2023. "Secondary market listings in equity crowdfunding: The missing link?," Research Policy, Elsevier, vol. 52(1).
    18. Kukk, Mari-Liis, 2022. "Predicting business failure after crowdfunding success: Are platforms the unsung heroes?," Journal of Business Venturing Insights, Elsevier, vol. 17(C).
    19. KURIHARA Koki & HONJO Yuji, 2022. "Determinants of Campaign Success: Empirical evidence from equity crowdfunding in Japan," Discussion papers 22057, Research Institute of Economy, Trade and Industry (RIETI).
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    More about this item

    Keywords

    Equity crowdfunding; Information asymmetry; Qualitative information;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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