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Signaling to Overcome Inefficiencies in Crowdfunding Markets

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The Economics of Crowdfunding

Abstract

This chapter positions the study of signals in crowdfunding within the broader literature on signaling in entrepreneurial finance. I deliver a theoretical discussion and definition of signals in crowdfunding, including examples of penalty and handicap signals, differentiating them from passive characteristics and cheap talk. I propose a taxonomy of signals that matches the senders—namely, such organizations as firms and nongovernmental organizations, and individuals, including both proponents and fellow crowd-funders—and receivers, such as backers, lenders, and investors. Existing studies are classified in this taxonomy based on the definitions of reward- and donation-based crowdfunding, crowd-investing, and crowd-lending. I conclude by identifying future research directions and calling for studies on post-signal performance.

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Notes

  1. 1.

    In this section, I adopt a strict definition of “signal” coherent with Spence’s original economic model. Literature has used less strict definitions, and has also included an actor’s inherent characteristics. When I review the current literature on signaling in crowdfunding in the next section, I will specifically identify how individual papers address signals.

  2. 2.

    I discuss the window-dressing theory later, in the section on signal confirmation and post-signal performance, in which I draw conclusions on the parallelism between crowdfunding offerings and initial public offerings by discussing the evidence and theories on IPOs’ long-term performance. I provide a definition and examples of cheap talk in this section that conform to Stiglitz’s original economic model; literature has used less strict definitions. When I review the current literature on signaling in crowdfunding in the following sections, I will specifically identify how individual papers address signals.

  3. 3.

    Additionally, some papers take a comparative perspective across platforms (Cumming and Zhang 2016; Cumming et al. 2017), or focus on specific topics, such as gender issues (Mohammadi and Shafi 2017; Vismara et al. 2017).

  4. 4.

    A survey of 158 successfully funded Kickstarter projects reveals that approximately 18% of the respondents raised outside risk capital in the forms of venture capital (VC) or business angel (BA) investing, while 8% through additional reward-based crowdfunding campaigns. The proponents’ specific industry experience and the presence of “a substantially complete business plan before fundraising” are the main predictors of outside funding (Mollick and Kuppuswamy 2014, 12).

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Authors and Affiliations

  1. Department of Economics and Technology Management, University of Bergamo, Bergamo, Italy

    Silvio Vismara

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  1. Silvio Vismara
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Editors and Affiliations

  1. Schulich School of Business, York University, Toronto, Canada

    Douglas Cumming

  2. Faculty of Business Studies and Economics, University of Bremen, Bremen, Germany

    Lars Hornuf

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Vismara, S. (2018). Signaling to Overcome Inefficiencies in Crowdfunding Markets. In: Cumming, D., Hornuf, L. (eds) The Economics of Crowdfunding. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-66119-3_3

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  • DOI: https://doi.org/10.1007/978-3-319-66119-3_3

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