Working Paper: CEPR ID: DP15058
Authors: Sudipto Dasgupta; Tingting Fan; Yiwei Li; Yizhou Xiao
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.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financing from friends (G32) | manipulation of funding performance (E63) |
| manipulation of funding performance (E63) | deter sophisticated investors (G19) |
| timing of friends' contributions (D64) | project quality (L15) |
| strategic financing from friends (G32) | attracts nave investors (G24) |
| presence of friends' financing (G32) | reduces likelihood of project success (H43) |
| higher percentage of large day 1 investments from friends (G24) | poorer fundraising outcomes (L31) |