Experts vs. Non-Experts in Online Crowdfunding Markets

56 Pages Posted: 23 Jun 2018 Last revised: 26 Dec 2020

See all articles by Mingfeng Lin

Mingfeng Lin

Scheller College of Business, Georgia Institute of Technology

Richard W. Sias

University of Arizona - Department of Finance

Zaiyan Wei

Purdue University - Krannert School of Management

Date Written: December 2020

Abstract

The growth of crowdfunding markets will soon accelerate due to recent changes in Securities Exchange Commission (SEC) regulations. Although it is well-recognized that these markets benefit from the participation of both expert and non-expert investors, theory suggests that experts will garner larger returns at the expense of non-experts and, as a result, the relative importance of non-experts in the market will decline over time until they become unimportant. We demonstrate, via simulations, that the extent to which non-experts are worse off when experts are introduced to a crowdfunding market varies dramatically as a function of project success (e.g., default rates on a debt crowdfunding platform), expert investors’ relative participation in the market, the quality of information signal, and expert investors’ diversification strategy. Exploiting a unique period in one crowdfunding market that allows us to directly measure the costs, we find that the negative effects of expert participation are small. The findings contribute to both theory and practice as they reveal that crowdfunding markets can be structured such that experts and non-experts peacefully coexist.

Keywords: FinTech, Crowdfunding, Experts, Non-experts

JEL Classification: G10, G11, G14, G18, G23, G4

Suggested Citation

Lin, Mingfeng and Sias, Richard W. and Wei, Zaiyan, Experts vs. Non-Experts in Online Crowdfunding Markets (December 2020). Georgia Tech Scheller College of Business Research Paper No. 18-22, Available at SSRN: https://ssrn.com/abstract=3185608 or http://dx.doi.org/10.2139/ssrn.3185608

Mingfeng Lin

Scheller College of Business, Georgia Institute of Technology ( email )

United States

Richard W. Sias (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Zaiyan Wei

Purdue University - Krannert School of Management ( email )

100 Grant St
West Lafayette, IN 47907-2076
United States
(765) 494-5958 (Phone)

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