With a Little Help from Friends: Strategic Financing and the Crowd

Posted: 19 Mar 2020 Last revised: 5 Oct 2020

See all articles by Sudipto Dasgupta

Sudipto Dasgupta

Chinese University of Hong Kong and CEPR

Tingting Fan

The Chinese University of Hong Kong (CUHK) - Department of Marketing

Yiwei Li

Lingnan University

Yizhou Xiao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: October 5, 2020

Abstract

We study the information role of financing from connected individuals (e.g., family and friends) of entrepreneurs based on a crowdfunding platform and social media account login data. While financing from connected individuals is generally considered as a signal of high-quality projects, our results suggest that this might be a signal of funding performance manipulation. Entrepreneurs with moderate early funding performance strategically solicit investments from friends to encourage naïve investors to herd. Sophisticated investors discern manipulation and are less likely to invest. Manipulation exists even when sophisticated investors have significant market power and projects with manipulation deliver poorer funding performance.

Keywords: Crowd funding, financing from friends, manipulation

JEL Classification: D83, G32, M31

Suggested Citation

Dasgupta, Sudipto and Fan, Tingting and Li, Yiwei and Xiao, Yizhou, With a Little Help from Friends: Strategic Financing and the Crowd (October 5, 2020). Available at SSRN: https://ssrn.com/abstract=3543878 or http://dx.doi.org/10.2139/ssrn.3543878

Sudipto Dasgupta

Chinese University of Hong Kong and CEPR ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Tingting Fan

The Chinese University of Hong Kong (CUHK) - Department of Marketing ( email )

Room 1101, 11/F, Cheung Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
China

Yiwei Li

Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Yizhou Xiao (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://sites.google.com/site/yizhouxiao/

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