Quality Revealing or Overstating? — Analysis on Qualitative Startup Information in Equity Crowdfunding
70 Pages Posted: 3 Dec 2018
Date Written: January 1, 2018
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: Suggested Citation