Testing-the-Waters Policy With Hypothetical Investment: Evidence From Equity Crowdfunding

Douglas Cumming, Fabrice Herve, Elodie Manthé and Armin Schwienbacher
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Elodie Manthé: IREGE - Institut de Recherche en Gestion et en Economie - USMB [Université de Savoie] [Université de Chambéry] - Université Savoie Mont Blanc

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Abstract: Digitization has enabled "testing-the-waters" in entrepreneurial finance whereby investors can make nonbinding commitments in equity crowdfunding prior to an actual campaign to ascertain interest in the project. We consider whether these nonbinding equity investment commitments are informative about actual investments during the campaign and, thus, ultimate startup funding success. The data indicate that only 18% of nonbinding commitments are, in fact, invested. The evidence is consistent with hypothetical bias. Hypothetical bias is significantly less pronounced among women and among investors living in higher income areas or in areas with higher levels of education. While investment intentions are only partially reliable at the individual level, the aggregate amount of collected investment intentions is a strong predictor of campaign success. We investigate alternative reasons for withdrawals, such as lying and informational motives, both of which we find implausible alternatives to hypothetical bias.

Keywords: Hypothetical bias; Voting; Equity crowdfunding; Trust (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

Published in Entrepreneurship Theory and Practice, 2022, 46 (4), pp.1019-1053. ⟨10.1177/1042258720932522⟩

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Journal Article: Testing-the-Waters Policy With Hypothetical Investment: Evidence From Equity Crowdfunding (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03971723

DOI: 10.1177/1042258720932522

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