Risk Disclosure in Crowdfunding

56 Pages Posted: 1 Apr 2017 Last revised: 10 Jul 2019

See all articles by Keongtae Kim

Keongtae Kim

Decision Science and Managerial Economics, Chinese University of Hong Kong

Jooyoung Park

Peking University - HSBC School of Business

Yang Pan

University of Maryland

Kunpeng Zhang

University of Maryland - Robert H. Smith School of Business

Xiaoquan (Michael) Zhang

Chinese University of Hong Kong; Massachusetts Institute of Technology (MIT) - Center for Digital Business

Date Written: July 3, 2019

Abstract

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

Kim, Keongtae and Park, Jooyoung and Pan, Yang and Zhang, Kunpeng and Zhang, Xiaoquan (Michael), Risk Disclosure in Crowdfunding (July 3, 2019). Available at SSRN: https://ssrn.com/abstract=2942685

Keongtae Kim (Contact Author)

Decision Science and Managerial Economics, Chinese University of Hong Kong ( email )

12 Chak Cheung street
Shatin
Hong Kong

Jooyoung Park

Peking University - HSBC School of Business ( email )

University Town
Shenzhen, 518055
China

Yang Pan

University of Maryland ( email )

Business Education Complex
2208
Baton Rouge, LA 70803
United States

Kunpeng Zhang

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Xiaoquan (Michael) Zhang

Chinese University of Hong Kong ( email )

Shatin, N.T.
Hong Kong

Massachusetts Institute of Technology (MIT) - Center for Digital Business ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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