Terms of endearment: Financing terms, risk, and ambiguity aversion in crowd investing

45 Pages Posted: 14 Jul 2020 Last revised: 8 Nov 2021

See all articles by Andrea Belz

Andrea Belz

University of Southern California - Viterbi School of Engineering

Alexandra Graddy-Reed

Sol Price School of Public Policy University of Southern California

Date Written: September 1, 2021

Abstract

Angel investors show evidence of heuristics in their decision making, but to date ambiguity aversion has been poorly studied in this context. Using a decision theory lens, we examine 240 investment opportunities on a crowd investing platform for scientific startups and explore disparities in outcomes based on the financial contract, specifically the use of debt. We find combinations of risks linked to decreased funding amounts; specifically, debt leads to lower funding amounts if the deal has one of two distinct risks: market, as evidenced by a business in the engineering sector; and team, represented by a higher fraction of females. Interest rates do not impact outcomes. These findings have important implications for entrepreneurial finance, decision theory, and science policy.

Keywords: crowdfunding, entrepreneurship, financing, convertible securities

JEL Classification: O32, G24

Suggested Citation

Belz, Andrea and Graddy-Reed, Alexandra, Terms of endearment: Financing terms, risk, and ambiguity aversion in crowd investing (September 1, 2021). Available at SSRN: https://ssrn.com/abstract=3631931 or http://dx.doi.org/10.2139/ssrn.3631931

Andrea Belz (Contact Author)

University of Southern California - Viterbi School of Engineering ( email )

3650 McClintock Ave
Los Angeles, CA
United States
2138210829 (Phone)

Alexandra Graddy-Reed

Sol Price School of Public Policy University of Southern California ( email )

Lewis Hall 312
Los Angeles, CA 90089-062
United States

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

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