Economic Consequences of Risk and Ability Disclosures: Evidence From Crowdfunding

73 Pages Posted: 15 Jul 2018 Last revised: 13 Nov 2018

See all articles by Joshua Madsen

Joshua Madsen

University of Minnesota - Twin Cities - Carlson School of Management

Jeff L. McMullin

Indiana University - Kelley School of Business - Department of Accounting

Date Written: November 12, 2018

Abstract

We exploit the introduction of a "risks and challenges" (RC) section on the crowdfunding website Kickstarter.com to study the role of disclosure in markets characterized by severe information asymmetries and agency frictions. Although the RC section contains voluntary and unaudited disclosures, after its addition projects with already observably risky characteristics attract fewer backers and are less likely to be funded, and project creators who respond to the prompt to discuss risks and abilities increase their non-risk disclosures and use a financing structure that accommodates greater risk. Risky projects attract relatively more backers and funding when project creators respond to the prompt, consistent with increased disclosure mitigating market frictions. Our findings suggest that crowdfunders change the types of projects they support and that project creators modify their disclosures and financing structure when prompted to consider risks.

Keywords: Disclosure, Crowdfunding, Risk, Salience

JEL Classification: M41, G24, L15, R12, D03

Suggested Citation

Madsen, Joshua and McMullin, Jeff L., Economic Consequences of Risk and Ability Disclosures: Evidence From Crowdfunding (November 12, 2018). Available at SSRN: https://ssrn.com/abstract=3202453 or http://dx.doi.org/10.2139/ssrn.3202453

Joshua Madsen (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Jeff L. McMullin

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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