Herding in Equity Crowdfunding
77 Pages Posted: 8 Dec 2017 Last revised: 9 Jan 2023
Date Written: June 18, 2019
We build a model of equity crowdfunding that incorporates the two major funding models: All-or-Nothing (AoN) and Keep-It-All (KIA). Both informed and uninformed investors arrive sequentially and rationally choose whether and how much to invest. The KIA solution turns out to be a reduced version of AoN without signaling. We test predictions using data from a leading European equity crowdfunding platform and find support. Results are consistent with rational information aggregation. However, negative information cascades may still appear. The AoN crowdfunding mechanism might therefore fail to finance a non-negligible percentage of positive NPV projects.
Keywords: Equity crowdfunding, Alternative finance, Start-ups, Entrepreneurship, Entrepreneurial finance, Herding, Dynamic Models
JEL Classification: D81, D83, G11, G14
Suggested Citation: Suggested Citation