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Risk Disclosure in Crowdfunding

Author

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  • Keongtae Kim

    (Chinese University of Hong Kong Business School, Chinese University of Hong Kong, Hong Kong)

  • Jooyoung Park

    (Peking University HSBC Business School, Shenzhen 518055, China)

  • Yang Pan

    (A.B. Freeman School of Business, Tulane University, New Orleans, Louisiana 70808)

  • Kunpeng Zhang

    (Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742)

  • Xiaoquan (Michael) Zhang

    (CUHK Business School, Chinese University of Hong Kong, Hong Kong; School of Economics and Management, Tsinghua University, Beijing 100084, China)

Abstract

How should crowdfunding platforms alleviate information asymmetry between creators and crowdfunders? In traditional financial markets, public companies are required to disclose potential risks to their investors, and such risk disclosure requirements are enforced by legal and fiduciary regulations. In the crowdfunding context, however, such information asymmetry concerns are often addressed by crowd-based platforms. In this study, we examine whether and how a regulation to increase the salience of project risks in crowdfunding affects crowdfunders’ funding decisions. Leveraging a policy change as an exogenous event, we adopt a difference-in-differences empirical strategy with a matching sample to compare funding decisions before and after the regulation was mandated and show differential effects between high- and low-risk projects. In addition, to strengthen the causality, we directly test individuals’ intention to pledge after reading project descriptions with and without risk disclosure in online experiments. We find that increasing the awareness of project risks is associated with inferior funding outcomes of crowdfunding projects, and the effect exists mainly for high-risk projects but not much for low-risk projects. In addition, high-risk projects benefit from a risk disclosure with relevant information, authentic language, and balanced tones that are not overly negative or optimistic. Despite the negative short-term effects, technology funders tend to interpret risk disclosures rationally over time, suggesting a positive long-term effect. Implications for research and insights for practitioners are discussed, particularly the fact that disclosure policies may make crowdfunding markets more sustainable by reducing information asymmetry and helping crowdfunders make more informed decisions.

Suggested Citation

  • Keongtae Kim & Jooyoung Park & Yang Pan & Kunpeng Zhang & Xiaoquan (Michael) Zhang, 2022. "Risk Disclosure in Crowdfunding," Information Systems Research, INFORMS, vol. 33(3), pages 1023-1041, September.
    • Handle: RePEc:inm:orisre:v:33:y:2022:i:3:p:1023-1041
    DOI: 10.1287/isre.2021.1096
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    References listed on IDEAS

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    Cited by:

    1. Dana Nayer & Mosi Rosenboim & Miki Malul, 2024. "The Two Sides of Crowdfunding Success: Attributes and Motivations of Backers and Entrepreneurs—Evidence from Israel," Journal of Entrepreneurship and Innovation in Emerging Economies, Entrepreneurship Development Institute of India, vol. 33(1), pages 155-182, February.
    2. Chandler, Jeffrey A. & Anglin, Aaron H. & Kanwal, Fizza & Short, Jeremy C., 2024. "No politics in funding pitches: An expectancy violations theory perspective of entrepreneurs' political expressions in crowdfunding," Journal of Business Venturing, Elsevier, vol. 39(1).
    3. Ye Liu & Ke Zhang & Weili Xue & Ziyu Zhou, 2024. "Crowdfunding innovative but risky new ventures: the importance of less ambiguous tone," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-43, December.

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