Wednesday, November 27, 2019 | 2:00pm-3:30pm | Room 335, HSBC Business School Building

Abstract

This paper studies the information role of strategic fundraising from family and friends.  Based on a crowdfunding and online social media data, we are able to identify contributions made by family and friends. While a large strand of literature considers financing from connected people as a signal of high-quality project, we show that it might be a signal of performance manipulation, and hence negatively correlated with the quality of the project. Entrepreneurs with mediocre early funding performance strategically allocate contributions from family and friends to encourage naïve funders to herd, while sophisticated funders are aware of potential manipulation and view fundraising from family and friends as a negative signal and are less likely to contribute. We found that even though the manipulation exists, projects with manipulation deliver poorer funding performance as sophisticated funders have significant market power.