Herding in equity crowdfunding

Thomas Åstebro; Manuel Fernández; Stefano Lovo; Nir Vulkan

doi:10.1111/1756-2171.12474

Herding in equity crowdfunding

Thomas Åstebro^*, Manuel Fernández, Stefano Lovo, Nir Vulkan

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

5 Scopus citations

Abstract

We build a model of equity crowdfunding that incorporates the two major funding models: all-or-nothing (AoN) and keep-it-all (KIA). Both informed and uninformed investors arrive sequentially and rationally choose whether and how much to invest. The KIA solution turns out to be a reduced version of AoN without signalling. We test predictions using data from a leading European equity crowdfunding platform and find support. Results are consistent with rational information aggregation. However, negative information cascades may still appear. The AoN crowdfunding mechanism might therefore fail to finance a nonnegligible percentage of positive NPV projects.

Original language	English
Pages (from-to)	403-441
Number of pages	39
Journal	RAND Journal of Economics
Volume	55
Issue number	3
DOIs	https://doi.org/10.1111/1756-2171.12474
State	Published - 1 Sep 2024

Bibliographical note

Publisher Copyright:
© 2024 The Author(s). The RAND Journal of Economics published by Wiley Periodicals LLC on behalf of The RAND Corporation.

Keywords

alternative finance
dynamic models
entrepreneurial finance
entrepreneurship
equity crowdfunding
herding
start-ups

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10.1111/1756-2171.12474

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abstract = "We build a model of equity crowdfunding that incorporates the two major funding models: all-or-nothing (AoN) and keep-it-all (KIA). Both informed and uninformed investors arrive sequentially and rationally choose whether and how much to invest. The KIA solution turns out to be a reduced version of AoN without signalling. We test predictions using data from a leading European equity crowdfunding platform and find support. Results are consistent with rational information aggregation. However, negative information cascades may still appear. The AoN crowdfunding mechanism might therefore fail to finance a nonnegligible percentage of positive NPV projects.",

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AU - Åstebro, Thomas

AU - Fernández, Manuel

AU - Lovo, Stefano

AU - Vulkan, Nir

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N2 - We build a model of equity crowdfunding that incorporates the two major funding models: all-or-nothing (AoN) and keep-it-all (KIA). Both informed and uninformed investors arrive sequentially and rationally choose whether and how much to invest. The KIA solution turns out to be a reduced version of AoN without signalling. We test predictions using data from a leading European equity crowdfunding platform and find support. Results are consistent with rational information aggregation. However, negative information cascades may still appear. The AoN crowdfunding mechanism might therefore fail to finance a nonnegligible percentage of positive NPV projects.

AB - We build a model of equity crowdfunding that incorporates the two major funding models: all-or-nothing (AoN) and keep-it-all (KIA). Both informed and uninformed investors arrive sequentially and rationally choose whether and how much to invest. The KIA solution turns out to be a reduced version of AoN without signalling. We test predictions using data from a leading European equity crowdfunding platform and find support. Results are consistent with rational information aggregation. However, negative information cascades may still appear. The AoN crowdfunding mechanism might therefore fail to finance a nonnegligible percentage of positive NPV projects.

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KW - dynamic models

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Herding in equity crowdfunding

Abstract

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Keywords

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