False signaling by platform team members and post-campaign venture outcomes: Evidence from an equity crowdfunding platform
研究发现股权众筹平台团队成员利用“投资后撤回”策略向不成熟的投资者传递虚假信号，支持前景较差的创业项目，导致这些项目在筹资后表现更差，尤其当平台高层参与时问题更严重。
In equity crowdfunding (ECF), early investments serve as signals of venture potential to prospective investors, making them more likely to join an offering. We argue that ECF platform team members can exploit this mechanism and convey false signals to unsophisticated investors. Data from a prominent ECF platform indicate that platform team members “invest” in ventures that exhibit weaker post-campaign outcomes. However, in ventures that successfully fundraise, platform team members typically withdraw their investment (after it incentivized others to join), and these ventures show even weaker post-campaign outcomes. Finally, ventures' post-campaign outcomes are particularly weak when this “invest-and-withdraw” tactic is executed by the platform's upper echelons, whose investments can further be perceived as endorsement signals by the crowd, despite significant goal incongruence between the upper echelons and the crowd. Our study presents novel theoretical and empirical insights into the signaling, financial misconduct, and ECF literature, and holds important policy implications. Past research has shown that equity crowdfunding (ECF) platforms can reduce agency problems between entrepreneurs and ECF investors, such as adverse selection problems, by providing selection and due diligence activities. In other words, past research has focused on the bright side of ECF platforms. However, this study focuses on a possible dark side of ECF platforms. The paper investigates the practice of ECF platform team members fabricating support (i.e., using an invest-and-withdraw tactic) towards firms with weaker prospects listed on their own platform. ECF platform team members can use an invest-and-withdraw tactic in firms with weaker prospects. Indeed, through their investments, ECF platform team members influence early investments, which are often used by prospective ECF investors as a quality signal to influence their own investment decisions. However, platform team members then withdraw their investments (after their investment lured follow-on investors to the offering). As such, platform team members convey false signals to unsophisticated ECF investors. The paper highlights an underexplored agency problem between ECF platforms and investors, where platform goals (such as higher platform fundraising success rates and increasing revenue generation, which require platforms where more deals get done) may conflict with investor interests. Theoretically, these agency problems and the fact that one can withdraw investments at zero cost during a cooling-off period may explain why ECF platform team members engage in false signaling to support firms with weaker prospects. More specifically, we expect that platform team members will invest in firms with weaker post-campaign prospects. Also, their investment withdrawals are expected to be especially correlated with weaker post-campaign venture outcomes. Finally, the investments of the platform’s upper echelons are expected to be particularly correlated with weaker post-campaign outcomes. Empirically, we use unique data from a leading ECF platform from a country with developed financial markets. The paper provides empirical support for the above expectations and underscores the need for policy attention to mitigate such possible misconduct. The goals of ECF platform team members are unlikely to always align with what ECF investors want. More specifically, ECF platform team members can use private information and exploit rules meant to protect buyers online (i.e., the cooling-off period, which allows for investment withdrawals at no cost) to support the fundraising of firms with weaker prospects on their platform. Our research adds to the signaling literature by highlighting false signals conveyed by ECF platform team members and especially the upper echelon members. The paper further contributes to the misconduct literature in entrepreneurial finance, which has mostly focused on entrepreneur and/or investor misconduct, while we focused on possible misconduct by platform team members who are generally viewed as benign. It focuses on an underexplored agency problem in entrepreneurial finance between platforms and ECF investors. The paper also adds to the ECF literature by providing novel insights into post-campaign venture outcomes. Finally, the paper further contributes to the discussion about the need for better regulations in ECF markets. More transparent information and limiting the possibility of invest-and-withdraw tactics might help channel funds to the most promising ventures, ultimately providing added value for the economy and ensuring the long-term prospects of the ECF market. • Equity crowdfunding platform team members frequently use an invest-and-withdraw tactic. • Ventures in which platform team members invest exhibit weaker post-campaign outcomes. • When platform team members withdraw the investments (after attracting others) ventures show even weaker ex-post outcomes. • Investments by the platform’s upper echelons are highly negatively associated with weaker post-campaign venture outcomes. • New insights into the signaling literature, by revealing the occurrence of false signaling by platform team members.