Hypothetical Bias in Equity Crowdfunding

Abstract

Young, entrepreneurial firms are particularly dependent on external investors to sustain their development. Are non-binding equity investment commitments informative? Our large sample evidence in the context of equity crowdfunding shows that only 18% of non-binding commitments made by investors in entrepreneurial firms are actually invested. The evidence is consistent with hypothetical bias. Hypothetical bias is significantly less pronounced among women, and among investors with greater social capital, proxied by education and wealth. 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 retractions, such as lying and informational motives, both of which we find implausible alternatives to hypothetical bias.

Keywords: hypothetical bias, voting, social capital, equity crowdfunding

JEL Classification: G21, G24, G32, K22, L26