Crowdfunding under market feedback, asymmetric information and overconfident entrepreneur

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Abstract

This article is the first one that considers a model of the choice between the different types of crowdfunding, which contains elements of the asymmetric information approach and behavioral finance (overconfident entrepreneurs).
The model provides several implications, most of which have not yet been tested. Our model predicts that equity-based crowdfunding is more profitable than reward-based crowdfunding when an entrepreneur is overconfident. This is because the entrepreneur learns from the sale of shares before making production decisions. The model also predicts that an equilibrium can exist where some firms use equity-based crowdfunding, which contrasts the results of traditional theories (which have rational managers), for example, the pecking-order theory. It also contrasts traditional behavioral finance literature (e. g. Fairchild, R. 2005. “The Effect of Managerial Overconfidence, Asymmetric Information, and Moral Hazard on Capital Structure Decisions.” ICFAI Journal of Behavioral Finance 2 (4).) where equity is not issued in equilibrium.
Original languageEnglish
Article number2019018
JournalEntrepreneurship Research Journal
Volume11
Issue number4
Early online date28 Feb 2020
DOIs
Publication statusPublished - 2021

Keywords

  • entrepreneurial finance
  • crowdfunding
  • asymmetric information
  • overconfidence
  • equity-based crowdfunding
  • reward-based crowdfunding
  • entrepreneurship and learning

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