With a Little Help from Friends: Strategic Financing and the Crowd
Posted: 19 Mar 2020 Last revised: 5 Oct 2020
Date Written: October 5, 2020
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: Suggested Citation