Risk Disclosure in Crowdfunding
56 Pages Posted: 1 Apr 2017 Last revised: 10 Jul 2019
Date Written: July 3, 2019
How should crowdfunding platforms alleviate information asymmetry between creators and crowdfunders? In traditional financial markets, public companies are required to disclose potential risks to their investors, and such risk disclosure requirements are enforced by legal and fiduciary regulations. In the crowdfunding context, however, such information asymmetry concerns are often addressed by crowd-based platforms. In this study, we examine whether and how risk disclosure of crowdfunding projects influences crowdfunders’ project perceptions and funding decisions. To examine the impact of risk disclosure holistically, we exploit a natural experiment, run two controlled experiments, and conduct a text-based machine learning analysis. We find that crowdfunders respond negatively to projects’ risk disclosure, while the negative effect of risk disclosure is smaller for projects that are more likely to deliver an expected reward. In addition, crowdfunders are sensitive to the content and presentation of disclosed risk information from projects and respond accordingly, though the association is stronger for more complex projects. We find that when projects are complex and challenging, funders pay more attention to risk information and the likelihood of receiving the promised rewards. These findings have implications for disclosure policies in crowd-based platforms and provide guidance for entrepreneurs seeking funds from crowds.
Keywords: crowdfunding, machine learning, natural experiment, project complexity, risk disclosure
JEL Classification: D81, M13, M15
Suggested Citation: Suggested Citation