Determinants of individual investment decisions in investment‐based crowdfunding

• Date: 01 May 2019
• DOI: http://doi.org/10.1111/jbfa.12372
• Author: Fabrice Hervé,Armin Schwienbacher,Elodie Manthé,Aurélie Sannajust
• Published date: 01 May 2019

DOI: 10.1111/jbfa.12372

Determinants of individual investment decisions

in investment-based crowdfunding

Fabrice Hervé1Elodie Manthé1Aurélie Sannajust2

Armin Schwienbacher3

1University of Bourgogne, IAE DIJON, EA

CREGO,UBFC, Dijon, France

2University of Lyon,UJM St-Etienne, COACTIS,

EA 4161, F-42023, Sainte-Etienne, France

3SKEMA Business School – Université Côte

d'Azur, Euralille,France

Correspondence

ArminSchwienbacher, SKEMA Business School,

AvenueWilly Brandt, 59777 Euralille, France.

Email:armin.schwienbacher@skema.edu

Abstract

We investigatedeterminants of investment decisions in investment-

based (equity and bond) crowdfunding campaigns, using a novel

investment-, investor- and campaign-level database, where equity

refers to investmentsin entrepreneurial start-ups and bonds to large

real estate projects. We find that investors who have higher social

interactions invest more. Social interactions are important in an

equity crowdfunding context but do not affect participation in bond

investments. This is consistent with the view that investors'social

networks help reduce information asymmetry. Women invest less

in the riskiest (equity) investments but more in safer ones (bonds).

These findings are better explained by differences in risk aversion

than differences in overconfidence between men and women. Over-

all, the findings contribute to the understanding of how investment-

based crowdfunding can be a viable source of entrepreneurial

finance and how entrepreneurs'campaign decisions affect investor

participation in this new form of entrepreneurial finance.

KEYWORDS

crowdfunding, entrepreneurial finance, equity, investment decision,

social interactions, start-up finance

1INTRODUCTION

Investors’ behavior has been extensively studied in finance. The areas of investigation include personal finance,

retirement savings, CEO investment choices, and venture capital finance. By contrast, scholars know little about the

decision-making process of non-expertindividuals in entrepreneurial finance (Ahlers, Cumming, Günther, & Schweizer,

2015; Hornuf & Schwienbacher,2016; Vismara, 2018). This paper attempts to fill this gap by providing an explanation

of equity and bond crowdfunding choices, which involve small, non-accredited investors. More precisely,we investi-

gate the influence of social interactions and gender on investment choices made in equity and bond crowdfunding

campaigns.

While reward- and donation-based crowdfunding has quickly become popular, due to Indiegogo in 2008 and

Kickstarter in 2009, equity crowdfunding has been slower to develop, notably because of regulatory constraints in

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2019 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/jbfa JBus Fin Acc. 2019;46:762–783.

HERVÉ ET AL.763

most countries in selling financial securities to the general public (Ahlers et al., 2015; Hornuf & Schwienbacher,2017;

Vismara, 2018). Crowdfunding has become a viable alternative to traditional sources of entrepreneurial finance and

a way to “democratize”finance by providing investment opportunities to innovative start-ups that, so far, have been

restricted to institutional and accredited investors (Agrawal, Catalini, & Goldfarb, 2015; Kim & Hann, 2015; Mollick,

2014).

Equity and bond-like (i.e., investment-based) crowdfunding are fundamentally different from other forms of

crowdfunding, in that the crowd makes investment rather than consumption- or donation-related decisions. There-

fore, current understanding of crowdfunding based on studies of these other forms of crowdfunding has limited

applicability to investment-based crowdfunding because incentives and compensation of the crowd are different

(Vismara, 2018). The issues investigated so far in the context of reward-based crowdfunding (Agrawal et al., 2015;

Butticè, Colombo, & Wright, 2017; Colombo, Franzoni, & Rossi-Lamastra, 2015; Kim & Hann, 2015; Marom, Robb, &

Sade, 2016; Mollick, 2014), including the effect of gender, geographic distance, social capital of entrepreneurs, and

the local environment in which investors live, must be analyzed separately for investment-basedcrowdfunding. Only

a few studies have examined related issues in equity crowdfunding. Mohammadi and Shafi (2018) show that women

tend to invest less in younger, high-tech firms with a high percentage of equity offerings. Vismara, Benaroio, and

Carne (2017) examine the effect of gender on the interaction between demand and supply of equity capital. Vismara

(2016) analyzes the impact of social capital of the entrepreneur. To the best of our knowledge, the impact of social

interactions of investors has not been examined in the contextof equity crowdfunding. In addition, equity and bond

crowdfunding inevitably affect the types of individuals who participate in these campaigns, which differ from the

forms of crowdfunding previously investigated.

Todevelop precise hypotheses and, thus, organize our analysis, we rely on behavioral finance and modern finance

theories that help explain the decisions of individual investorsand the possible biases to which they may be subject. In

particular,we derive predictions on how social interactions may affect investment decisions. Toprovide suitable tests,

we investigate this effect on equity and bond crowdfunding campaigns. We expect a differentiated impact of social

interactions on equity and bonds investment choices because these two types of securities are intrinsically different

and have, by nature, different levelsof risk. Moreover, as a means to better understand gender differences we explore

whether differences in risk aversion and overconfidencebetween individuals can affect investment decisions. We also

exploit both sets of crowdfunding types, equity and bond, which differ in risk, to explaingender differences.

We use a unique database to examine the behavior of investment-basedcrowdfunders. We obtain all investments

made on the French platform WiSEED in equity and bond crowdfunding campaigns since its start in 2009. Tothe best

of our knowledge, this database provides more information than what other studies have used so far. Our database

contains 10,142 individual investment decisions, 73.1% of which are equity crowdfunding investment decisions. The

database contains information on individual investors, including their date of birth, gender, and location of domicile.

We are able to track all the investmentsmade by every individual, so we know when someone has invested, how much

in which campaign, when, and in which other campaign(s) he or she has participated. From the location of investors,we

arefurther able to combine our investment database with other databases to assess local conditions that are helpful for

testing our hypotheses. In addition to investor-level information, our database contains various information on cam-

paign structure, start-ups, and projects. On the WiSEED platform, bond-like securities are only offered in one sector:

real estate.

We find that social interactions exert a strong influence on the investment made bycrowd investors. More pre-

cisely,crowd investors with more daily social interactions invest more than others. In particular, we observea stronger

effect of social interactions for equity crowdfunding than for bond crowdfunding. This is in line with an information-

based explanation of investments as proposed by Hong, Kubik, and Stein (2004) in the contextof stock markets and

by Vismara(2016) in the context of equity crowdfunding. Investors process and extract information during their social

interactions. The more they interact, the more they obtain information through their interpersonal ties, the less they

are subject to information asymmetry for a given project, and the more they invest. This is what Granovetter (1983)

calls the “strength of weak ties.” Tothe best of our knowledge, our study is the first to document this issue for equity

crowdfunding.