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Crowdfunding Under Market Feedback, Asymmetric Information And Overconfident Entrepreneur

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  • Miglo Anton

    (Birmingham City Business School, Birmingham City University, BirminghamB5 5JU, United Kingdom)

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.

Suggested Citation

  • Miglo Anton, 2021. "Crowdfunding Under Market Feedback, Asymmetric Information And Overconfident Entrepreneur," Entrepreneurship Research Journal, De Gruyter, vol. 11(4), pages 1-19, October.
    • Handle: RePEc:bpj:erjour:v:11:y:2021:i:4:p:19:n:1
    DOI: 10.1515/erj-2019-0018
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    14. Daylian M. Cain & Don A. Moore & Uriel Haran, 2015. "Making sense of overconfidence in market entry," Strategic Management Journal, Wiley Blackwell, vol. 36(1), pages 1-18, January.
    15. Anton Miglo, 2020. "Financing of Entrepreneurial Firms in Canada: Some Patterns," Administrative Sciences, MDPI, vol. 10(3), pages 1-27, August.
    16. Lars Hornuf & Matthias Neuenkirch, 2017. "Pricing shares in equity crowdfunding," Small Business Economics, Springer, vol. 48(4), pages 795-811, April.
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    20. John S. Chen & David C. Croson & Daniel W. Elfenbein & Hart E. Posen, 2018. "The Impact of Learning and Overconfidence on Entrepreneurial Entry and Exit," Organization Science, INFORMS, vol. 29(6), pages 989-1009, December.
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    Cited by:

    1. Davies, William Edmund & Giovannetti, Emanuele, 2022. "Latent network capital and gender in crowdfunding: Evidence from the Kiva platform," Technological Forecasting and Social Change, Elsevier, vol. 182(C).
    2. Marco Bade & Martin Walther, 2021. "Local preferences and the allocation of attention in equity-based crowdfunding," Review of Managerial Science, Springer, vol. 15(8), pages 2501-2533, November.
    3. Miglo, Anton, 2018. "Crowdfunding in a duopoly under asymmetric information," MPRA Paper 89016, University Library of Munich, Germany.
    4. Sylvain Béal & Marc Deschamps & Catherine Refait-Alexandre & Guillaume Sekli, 2022. "Early contributors, cooperation and fair rewards in crowdfunding," Working Papers hal-04222321, HAL.
    5. Anton Miglo, 2021. "STO vs. ICO: A Theory of Token Issues under Moral Hazard and Demand Uncertainty," JRFM, MDPI, vol. 14(6), pages 1-35, May.
    6. Anton Miglo, 2023. "ICO vs. Equity Financing under Imperfect, Complex and Asymmetric Information," FinTech, MDPI, vol. 3(1), pages 1-23, December.
    7. Swati Oberoi & Smita Srivastava & Vishal K. Gupta & Rohit Joshi & Atul Mehta, 2022. "Crowd Reactions to Entrepreneurial Failure in Rewards-Based Crowdfunding: A Psychological Contract Theory Perspective," JRFM, MDPI, vol. 15(7), pages 1-26, July.
    8. Anton Miglo, 2020. "Crowdfunding in a Competitive Environment," JRFM, MDPI, vol. 13(3), pages 1-38, February.

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    More about this item

    Keywords

    entrepreneurial finance; crowdfunding; asymmetric information; overconfidence; equity-based crowdfunding; reward-based crowdfunding; entrepreneurship and learning;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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