Signaling in Equity Crowdfunding

TLDR

The study investigates how entrepreneurs’ signals—such as venture quality and uncertainty—affect small investors’ commitment in equity crowdfunding. Using empirical analysis, the authors assess the influence of human, social, and intellectual capital, along with uncertainty, on equity crowdfunding fundraising outcomes. Results show that retaining equity and detailed risk disclosures strongly boost funding success, whereas social and intellectual capital have minimal effect.

Abstract

This paper presents a first–ever empirical examination of the effectiveness of signals that entrepreneurs use to induce (small) investors to commit financial resources in an equity crowdfunding context. We examine the impact of venture quality (human capital, social [alliance] capital, and intellectual capital) and uncertainty on fundraising success. Our data highlight that retaining equity and providing more detailed information about risks can be interpreted as effective signals and can therefore strongly impact the probability of funding success. Social capital and intellectual capital, by contrast, have little or no impact on funding success. We discuss the implications of our results for theory, future research, and practice.