Herding in Equity Crowdfunding
71 Pages Posted: 8 Dec 2017 Last revised: 1 Oct 2020
Date Written: June 18, 2019
Do equity crowdfunding investors rationally or irrationally herd? We build a model of rational information aggregation where both informed and uninformed investors arrive sequentially and rationally choose whether and how much to invest. We compare the predictions of the model to several alternative models of irrational herding and no herding, and test those predictions using data on all investments on a leading European equity crowdfunding platform. We show empirically that the size and likelihood of a pledge is causally affected by the size of the most recent pledge, and by the time elapsed since the most recent pledge. These results are consistent with rational information aggregation, and inconsistent with naive herding, independent investments, and common information shocks. However, there is still room for negative information cascades to occur. Implications for platform design and regulatory actions are discussed.
Keywords: Equity Crowdfunding, Herding
JEL Classification: D81, D83, G11, G14
Suggested Citation: Suggested Citation