Table 1 Explanations of Local Preferences

From: Local preferences and the allocation of attention in equity-based crowdfunding

  Studies in the non-crowdfunding-related literature Relevance for equity-based crowdfunding Why should this be investigated in the context of local preferences in equity-based crowdfunding?
Economic reasons (related to, e.g., asymmetric information and cost of information acquisition, exchange rates, transaction costs, riskiness of investments) Lewis (1999)
Coval and Moskowitz (1999)
Coval and Moskowitz (2001)
Grinblatt and Keloharju (2001)
Malloy (2005)
Ivković and Weisbenner (2005)
Kimball and Shumway (2006)
Fidora et al. (2007)
Butler (2008)
Hortaçsu et al. (2009)
Baik et al. (2010)
Most relevant: asymmetric information
- Degree of information asymmetry in equity-based crowdfunding higher than in other forms of crowdfunding
- Economic/financial objectives of investors more important than in other forms of crowdfunding
- Investors are mostly unsophisticated and have weak skills to acquire private information, thus might be particularly receptive to public information signals
Transaction cost, exchange rates, etc. more relevant in international context and less relevant in equity-based crowdfunding, because no product or service is traded (no shipping cost, no consumption of services)
Previous research in context of equity-based crowdfunding provides mixed evidence on the role of information asymmetry for local preferences:
- Agrawal et al. (2015): local investors are less responsive to public information on cumulative investment than distants; friends & family explain local bias largely
- Hornuf et al. (2020): friends & family and angel-like investors are better at resolving information asymmetry, thus have stronger local bias than other investor types; well-diversified investors care less about geography
- The role of information asymmetry between entrepreneurs and different types of investors and within the crowd is underexplored
- How differently informed investors (locals vs. non-locals, non-friends-&-family) respond to different types of signals has not yet been studied
Idea: Investors with different levels of information may behave differently in terms of investments
Limited information processing capacity (“Attention allocation theory”) Van Nieuwerburgh and Veldkamp (2009)
Mondria and Wu (2010)
Prevalence of asymmetric information, predominance of unsophistication among investors, weak information processing skills, limited capital stock suggest that investors are highly selective concerning their allocation of attention to campaigns in equity-based crowdfunding - Investors’ allocation of attention has not yet been studied in the crowdfunding literature
- Theory is closely connected to information-asymmetry explanation of local preferences
- The fact that the literature has overlooked this theory in the context of crowdfunding opens research gap
- Understanding how investors’ attention allocation in the presence of asymmetric information affects local preferences is important for entrepreneurs, platforms and investors themselves
Idea: Locals have superior information; theory suggests that investors are differently attentive to local and remote campaigns, thus respond differently to information signals
Behavioural reasons (related to, e.g., familiarity, trust, warm-glow giving, altruism, overconfidence, culture, patriotism, favouritism) Heath and Tversky (1991)
Kilka and Weber (2000)
Huberman (2001)
Jeske (2001)
Strong and Xu (2003)
Franke et al. (2006)
Massa and Simonov (2006)
Lai and Teo (2008)
Graham et al. (2009)
Morse and Shive (2011)
Pradkhan (2016) Bretschneider and Leimeister (2017)
Cornaggia et al. (2020)
Familiarity and tangibility issues most relevant if product or service is traded; thus rather relevant in, e.g., reward-based crowdfunding
Warm-glow giving and altruism rather relevant in donation-based crowdfunding or micro loans
Culture and patriotism rather relevant for home bias in international context (our study has rather national context, focus on local bias/preferences)
Probably most relevant in equity-based crowdfunding: trust, overconfidence, favouritism
Only one study focuses on behavioural explanations of home bias in dept-based crowdfunding Lin and Viswanathan (2016): economic explanations not sufficient to explain home bias; behavioural reasons explain home bias at least partly
In comparison to economic and attention-allocation-based explanations, relevance of behavioural explanations appears to be rather subordinate in the context of equity-based crowdfunding
  1. Note: This table provides an overview of possible explanations of local preferences, exemplary studies from the non-related crowdfunding literature, the relevance of each explanation for equity-based crowdfunding and justifications for an investigation in the context in equity-based crowdfunding