Does a Local Bias Exist in Equity Crowdfunding?

90 Pages Posted: 24 Mar 2020

See all articles by Lars Hornuf

Lars Hornuf

University of Bremen - Faculty of Business Studies and Economics; Max Planck Institute for Innovation and Competition; CESifo (Center for Economic Studies and Ifo Institute)

Matthias Schmitt

Max Planck Institute for Innovation and Competition

Eliza Stenzhorn

University of Bremen - Faculty of Business Studies and Economics

Date Written: 2020

Abstract

We use hand-collected data of 20,460 investment decisions and two distinct portals to analyze whether investors in equity crowdfunding direct their investments to local firms. In line with agency theory, the results suggest that investors exhibit a local bias, even when we control for family and friends. In addition to the regular crowd, our sample includes angel-like investors, who invest considerable amounts and exhibit a larger local bias. Well-diversified investors are less likely to suffer from this behavioral anomaly. The data further show that portal design is important for attracting investors more prone to having a local bias. Overall, we find that investors who direct their investments to local firms more often pick start-ups that run into insolvency or are dissolved, which indicates that local investments in equity crowdfunding constitute a behavioral anomaly rather and a rational preference. Here again, however, portal design plays a crucial role.

Keywords: equity crowdfunding, crowdinvesting, local bias, individual investor behavior, entrepreneurial finance

JEL Classification: G110, G240, K220, M130

Suggested Citation

Hornuf, Lars and Schmitt, Matthias and Stenzhorn, Eliza, Does a Local Bias Exist in Equity Crowdfunding? (2020). Max Planck Institute for Innovation & Competition Research Paper No. 16-07, CESifo Working Paper No. 8154, Available at SSRN: https://ssrn.com/abstract=3555581 or http://dx.doi.org/10.2139/ssrn.3555581

Lars Hornuf (Contact Author)

University of Bremen - Faculty of Business Studies and Economics ( email )

Bremen, D-28359
Germany
+49 89 20348619 (Phone)

HOME PAGE: http://www.hornuf.com

Max Planck Institute for Innovation and Competition ( email )

Marstallplatz 1
Munich, Bayern 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Matthias Schmitt

Max Planck Institute for Innovation and Competition ( email )

Marstallplatz 1
Munich, Bayern 80539
Germany

HOME PAGE: http://www.ip.mpg.de

Eliza Stenzhorn

University of Bremen - Faculty of Business Studies and Economics ( email )

Bremen, D-28359
Germany

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