With a Little Help from Friends: Strategic Financing and the Crowd

Sudipto Dasgupta, Tingting Fan, Yiwei Li and Yizhou Xiao

No 15058, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Based on a crowdfunding platform and social media account login data, we study the information role of financing from connected individuals (e.g., family and friends) of entrepreneurs. While financing from connected individuals is generally considered as a signal of high-quality projects, our results suggest that this might be a signal of funding performance manipulation. Entrepreneurs with moderate early funding performance strategically solicit investments from friends to encourage naïve investors to herd. Sophisticated investors discern manipulation and are less likely to invest. Manipulation exists even when sophisticated investors have significant market power and projects with manipulation deliver poorer funding performance.

Date: 2020-07
New Economics Papers: this item is included in nep-ent, nep-pay and nep-soc
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