Quality Revealing or Overstating? — Analysis on Qualitative Startup Information in Equity Crowdfunding

70 Pages Posted: 3 Dec 2018

See all articles by Sofia Johan

Sofia Johan

Florida Atlantic University - Finance; Tilburg Law and Economics Center (TILEC)

Yelin Zhang

Gonzaga University - School of Business Administration

Date Written: January 1, 2018

Abstract

We study the information asymmetry between equity crowdfunding entrepreneurs and investors. We find that entrepreneurs use textual business information to mitigate this information asymmetry and to realize better fundraising outcome. It pays off for all startups to disclose textual information, although high quality firms benefit more from the disclosure than low quality firms. However, entrepreneurs’ excessive use of positive words, or self-praise on quality without adequate factual support, is not rewarded by investors. Title III of JOBS Act amplifies this information asymmetry and results in investor herding and increased heterogeneity in crowdfunding outcomes. Empirical data from EquityNet support our analyses.

Keywords: Equity Crowdfunding, Information Asymmetry, Textual Information, Title III of JOBS Act

JEL Classification: G23, G24, L26

Suggested Citation

Johan, Sofia A. and Zhang, Yelin, Quality Revealing or Overstating? — Analysis on Qualitative Startup Information in Equity Crowdfunding (January 1, 2018). Available at SSRN: https://ssrn.com/abstract=3291905 or http://dx.doi.org/10.2139/ssrn.3291905

Sofia A. Johan

Florida Atlantic University - Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Yelin Zhang (Contact Author)

Gonzaga University - School of Business Administration ( email )

Spokane, WA
United States

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