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With a Little Help from Friends: Strategic Financing and the Crowd

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  • Dasgupta, Sudipto
  • Fan, Tingting
  • Li, Yiwei
  • Xiao, Yizhou

Abstract

Based on a crowdfunding platform and social media account login data, we study the information role of financing from connected individuals (e.g., family and friends) of entrepreneurs. While financing from connected individuals is generally considered as a signal of high-quality projects, our results suggest that this might be a signal of funding performance manipulation. Entrepreneurs with moderate early funding performance strategically solicit investments from friends to encourage naïve investors to herd. Sophisticated investors discern manipulation and are less likely to invest. Manipulation exists even when sophisticated investors have significant market power and projects with manipulation deliver poorer funding performance.

Suggested Citation

  • Dasgupta, Sudipto & Fan, Tingting & Li, Yiwei & Xiao, Yizhou, 2020. "With a Little Help from Friends: Strategic Financing and the Crowd," CEPR Discussion Papers 15058, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15058
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