Does Consumer Protection Enhance Disclosure Credibility in Reward Crowdfunding?
Journal of Accounting Research 57 (5): 1247-1302, December 2019
114 Pages Posted: 12 Jun 2018 Last revised: 15 Feb 2020
Date Written: October 14, 2019
Abstract
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 change in Kickstarter’s terms of use that increases the threat of consumer litigation, the association between project funding and disclosure becomes stronger. This evidence suggests that consumer protection regulation enhances the perceived credibility of disclosure. We find the effect of the change in terms of use 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