Does Consumer Protection Enhance Disclosure Credibility in Reward Crowdfunding?
78 Pages Posted: 12 Jun 2018 Last revised: 16 Jul 2018
Date Written: July 3, 2018
We study how the interplay of disclosure and regulation shapes capital allocation in reward crowdfunding. Using data from Kickstarter, the largest online reward crowdfunding platform, we show that, even in the absence of clear regulation and enforcement mechanisms, disclosure helps entrepreneurs access capital for their projects and bolsters engagement with potential project backers, consistent with the notion that disclosure mitigates moral hazard. We further document that, subsequent to a rule change on Kickstarter that increases the threat of consumer litigation, the association between project funding and disclosure increases. This evidence suggests that consumer protection regulation enhances the perceived credibility of disclosure. We find the effect of the rule change to be more pronounced in states with stricter consumer protection regulations. Taken together, our findings yield important insights on the role of disclosure, as well as on the potential effects of increased regulation on crowdfunding platforms.
Keywords: Crowdfunding, Disclosure, Consumer Protection, Regulation, Enforcement
JEL Classification: G18, M41, M48, O31, O38
Suggested Citation: Suggested Citation