Quality Revealing Versus Overstating in Equity Crowdfunding

Abstract

This paper studies the impact of qualitative business information on mitigating information
asymmetry between equity crowdfunding entrepreneurs and investors. Qualitative business
information covers the entrepreneurs’ introduction on business model, competitive strategy,
product market, drivers and barriers for product/service adoption and business milestones.
Empirical data reveal that, overall, more detailed disclosure of qualitative business information
leads to better fundraising outcome. However, while entrepreneurs’ excessive use of promotional
language, or self-praise on business quality without factual support, is not rewarded by
sophisticated investors, ordinary investors are less resistant to promotional language. We also find
that Title III of the JOBS Act results in a reduction of the percentage of completed fundraisings
but exacerbates the effect of project description on the percentage of completed fundraisings.

Keywords: Equity Crowdfunding, Information Asymmetry, Qualitative Information

JEL Classification: G23, G24, L26