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Testing-the-Waters Policy With Hypothetical Investment: Evidence From Equity Crowdfunding

Author

Listed:
  • Douglas Cumming

    (Florida Atlantic University [Boca Raton])

  • Fabrice Hervé

    (CREGO - Centre de Recherche en Gestion des Organisations - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UB - Université de Bourgogne - UBFC - Université Bourgogne Franche-Comté [COMUE] - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE])

  • Elodie Manthé

    (IREGE - Institut de Recherche en Gestion et en Economie - USMB [Université de Savoie] [Université de Chambéry] - Université Savoie Mont Blanc)

  • Armin Schwienbacher

    (SKEMA Business School - SKEMA Business School)

Abstract

Digitization has enabled "testing-the-waters" in entrepreneurial finance whereby investors can make nonbinding commitments in equity crowdfunding prior to an actual campaign to ascertain interest in the project. We consider whether these nonbinding equity investment commitments are informative about actual investments during the campaign and, thus, ultimate startup funding success. The data indicate that only 18% of nonbinding commitments are, in fact, invested. The evidence is consistent with hypothetical bias. Hypothetical bias is significantly less pronounced among women and among investors living in higher income areas or in areas with higher levels of education. While investment intentions are only partially reliable at the individual level, the aggregate amount of collected investment intentions is a strong predictor of campaign success. We investigate alternative reasons for withdrawals, such as lying and informational motives, both of which we find implausible alternatives to hypothetical bias.

Suggested Citation

  • Douglas Cumming & Fabrice Hervé & Elodie Manthé & Armin Schwienbacher, 2022. "Testing-the-Waters Policy With Hypothetical Investment: Evidence From Equity Crowdfunding," Post-Print hal-03971723, HAL.
    • Handle: RePEc:hal:journl:hal-03971723
    DOI: 10.1177/1042258720932522
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    Cited by:

    1. Massimo G. Colombo & Benedetta Montanaro & Silvio Vismara, 2023. "What drives the valuation of entrepreneurial ventures? A map to navigate the literature and research directions," Small Business Economics, Springer, vol. 61(1), pages 59-84, June.
    2. Shane Enete & Tim Sturr, 2023. "How Corporate Sociopolitical Activism (CSA) impacts portfolio allocations: an experiment," International Journal of Corporate Social Responsibility, Springer, vol. 8(1), pages 1-11, December.
    3. Gallucci, Carmen & Giakoumelou, Anastasia & Santulli, Rosalia & Tipaldi, Riccardo, 2023. "How financial literacy moderates the relationship between qualitative business information and the success of an equity crowdfunding campaign: Evidence from Mediterranean and Gulf Cooperation Council ," Technology in Society, Elsevier, vol. 75(C).
    4. Guillochon, Justine, 2022. "The role of media, policy and regional heterogeneity in renewable energy project crowdfunding," Energy Economics, Elsevier, vol. 115(C).

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