Skip to main content
SpringerLink
Log in

Is the crowd sensitive to distance?—how investment decisions differ by investor type

  • Published:
Small Business Economics Aims and scope Submit manuscript

Abstract

This paper presents the first evidence of the influence of geographic distance among retail, accredited, and overseas investors and venture location in an equity crowdfunding context. By analyzing investment decisions, we show that geographic distance is negatively correlated with investment probability for all home country investors. Our comparison of home country and overseas investors reveals that overseas investors are not sensitive to distance. However, when comparing only home country investors (subdivided into retail and accredited), we document that both investor types are similarly sensitive to the distance of possible ventures.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. The Earth is approximately spherical. Therefore, the distances from points on the surface to the center range from 6353 to 6384 km. This is why we take the mean.

  2. The 34 overseas investors are located in Germany (2), Hong Kong (2), New Zealand (3), Russia (12), Singapore (2), South Africa (1), Thailand (2), the UK (6), the USA (3), and Vietnam (1).

  3. For the sake of clarity, we do not explicitly report the coefficients and test statistics for the big cities (Sydney, Melbourne, Brisbane, and Perth) in Tables 3 and 4. To summarize, we find a statistically significant effect only for ventures in Brisbane having a higher probability of obtaining investments. This effect is evident in all models in Tables 3 and 4.

  4. Consistent with Ahlers et al. (2015), we use the same control variables.

  5. The big city fixed effects are especially useful for addressing a potential selection problem from a higher likelihood that projects will be located in metropolitan areas. We can thus address the higher propensity of projects being born in Sydney, Brisbane, Melbourne, or Perth, while at the same time control for the potentially higher attractiveness of these projects given their location in densely populated areas, and for the fact that more potential investors or closer networks may be located in these larger cities.

  6. Given that we only analyze investors who invested at least once into a project, all our results need to be interpreted carefully. We cannot make any statement about whether a larger distance to a project might keep a potential investor from investing into a project all together. Given this selection bias, our results need to be interpreted conditional on the fact that an investor invested at least in one campaign. Moreover, the clear dominance of the economic activity in the southeast of Australia could potentially lead to spatial autocorrelation.

References

  • Agrawal, A., Catalini, C., & Goldfarb, A. (2011). The geography of crowd funding. Available at SSRN: http://ssrn.com/abstract=1692661 .

  • Agrawal, A., Catalini, C., & Goldfarb, A. (2014). Crowd funding: geography, social networks, and the timing of investment decisions. Journal of Economics & Management Strategy, 24, 253–274.

    Article  Google Scholar 

  • Ahearne, A. G., Griever, W. L., & Warnock, F. E. (2004). Information costs and home bias: an analysis of US holdings of foreign equities. Journal of International Economics, 62, 313–336.

    Article  Google Scholar 

  • Ahlers, G. K. C., Cumming, D. J., Guenther, C., & Schweizer, D. (2015). Signaling in equity crowdfunding. Entrepreneurship Theory and Practice, 39, 955–980.

    Article  Google Scholar 

  • Alexy, O., Block, J., Sandner, P., & Ter Wal, A. (2012). Social capital of venture capitalists and start-up funding. Small Business Economics, 39, 835–851.

    Article  Google Scholar 

  • Baum, J. A., & Silverman, B. S. (2004). Picking winners or building them? Alliance, intellectual, and human capital as selection criteria in venture financing and performance of biotechnology startups. Journal of Business Venturing, 19, 411–436.

    Article  Google Scholar 

  • Belleflamme, P., Lambert, T., & Schwienbacher, A. (2013). Individual crowdfunding practices. Venture Capital: An International Journal of Entrepreneurial Finance, 29, 585–609.

    Google Scholar 

  • Belleflamme, P., Lambert, T., & Schwienbacher, A. (2014). Crowdfunding: tapping the right crowd. Journal of Business Venturing, 29, 585–609.

    Article  Google Scholar 

  • Bernstein, S., Korteweg, S.G., & Laws, K. (2016). Attracting early stage investors: evidence from a randomized field experiment. Journal of Finance, Forthcoming.

  • Bertoni, F., Colombo, M. G., & Grilli, L. (2013). Venture capital investor type and the growth mode of new technology-based firms. Small Business Economics, 40, 527–552.

    Article  Google Scholar 

  • Bradford, S. C. (2012). Crowdfunding and the federal securities laws. Columbia Business Law Review, 2001(1), 3–148.

    Google Scholar 

  • Burtch, G., Ghose, A., & Wattal, S. (2013). An empirical examination of the antecedents and consequences of contribution patterns in crowd-funded markets. Information Systems Research, 24, 499–519.

    Article  Google Scholar 

  • Burtch, G., Ghose, A., & Wattal, S. (2014). Cultural differences and geography as determinants of online pro-social lending. MIS Quarterly, 38, 773–794.

    Article  Google Scholar 

  • Burtch, G., Ghose, A., & Wattal, S. (2015). The hidden cost of accommodating crowdfunder privacy preferences: a randomized field experiment. Management Science, 61, 949–962.

    Article  Google Scholar 

  • Chan, K., Covrig, V., & Ng, L. (2005). What determines domestic bias and foreign bias? Evidence from mutual fund equity allocations worldwide. Journal of Finance, 60, 1495–1534.

    Article  Google Scholar 

  • Cohen, L. (2009). Loyalty-based portfolio choice. Review of Financial Studies, 22, 1213–1245.

    Article  Google Scholar 

  • Colombo, M. G., Croce, A., & Grilli, L. (2013). ICT services and small businesses’ productivity gains: an analysis of the adoption of broadband internet technology. Information Economics and Policy, 25, 171–189.

    Article  Google Scholar 

  • Colombo, M. G., Franzoni, C., & Rossi-Lamastra, C. (2014). Internal social capital and the attractions on early contributions. Entrepreneurship Theory and Practice, 39, 75–100.

    Article  Google Scholar 

  • Coval, J. D., & Moskowitz, T. J. (1999). Home bias at home: local equity preference in domestic portfolios. Journal of Finance, 54, 2045–2073.

    Article  Google Scholar 

  • Coval, J., & Moskowitz, T. (2001). The geography of investment: informed trading and asset prices. Journal of Political Economy, 109, 811–841.

    Article  Google Scholar 

  • Cumming, D. J., & Dai, N. (2010). Local bias in venture capital investments. Journal of Empirical Finance, 17, 362–380.

    Article  Google Scholar 

  • Cumming, D. J., & Johan, S. (2006). Provincial preferences in private equity. Financial Markets and Portfolio Management, 20, 369–398.

    Article  Google Scholar 

  • Cumming, D. J., & Johan, S. (2007). Advice and monitoring in venture finance. Financial Markets and Portfolio Management, 21, 3–43.

    Article  Google Scholar 

  • Cumming, D. J., & Johan, S. (2013). Demand driven securities regulation: evidence from crowdfunding. Venture Capital: An International Journal of Entrepreneurial Finance, 15, 361–379.

    Article  Google Scholar 

  • Cumming, D.J., Hornuf, L., Karami, M., & Schweizer, D. (2016). Disentangling crowdfunding from fraudfunding. Max Planck Institute for Innovation & Competition Research Paper No. 16-09. Available at SSRN: http://ssrn.com/abstract=2828919 .

  • Cumming, D. J., Leboeuf, G., & Schwienbacher, A. (2014). Crowdfunding models: keep-it-all versus all or nothing. Working Paper: York University and SKEMA Business School.

    Google Scholar 

  • Cumming, D. J., & Vismara, S., 2016. De-segmenting research in entrepreneurial finance. Venture Capital An International Journal of Entrepreneurial Finance. Forthcoming.

  • Disdier, A., & Head, K. (2008). The puzzling persistence of the distance effect on bilateral trade. Review of Economics and Statistics, 90, 37–48.

    Article  Google Scholar 

  • Feng, L., & Seasholes, M. S. (2004). Correlated trading and location. Journal of Finance, 59, 2117–2144.

    Article  Google Scholar 

  • Florida, R., & Smith, F. (1994). Venture capital formation, investment, and regional industrialization. Annals of the Association of American Geographers, 83, 434–451.

    Article  Google Scholar 

  • Franke, N., Gruber, M., Harhoff, D., & Henkel, J. (2006). What you are is what you like—similar biases in venture capitalists’ evaluations of start-up teams. Journal of Business Venturing, 21, 802–826.

    Article  Google Scholar 

  • French, K. R., & Poterba, J. M. (1991). Investor diversification and international equity markets. American Economic Review, 81, 222–226.

    Google Scholar 

  • Garcia, D., & Strobl, G. (2011). Relative wealth concerns and complementarities in information acquisition. Review of Financial Studies, 24, 169–207.

    Article  Google Scholar 

  • Ritov, I., Gati, I., & Tversky, A. (1990). Differential weighting of common and distinctive components. Journal of Experimental Psychology: General, 119, 30–41.

    Article  Google Scholar 

  • Grinblatt, M., & Keloharju, M. (2001). How distance, language, and culture influence stockholdings and trades. Journal of Finance, 56, 1053–1073.

    Article  Google Scholar 

  • Guiso, L., Sapienza, P., & Zingales, L. (2009). Cultural biases in economic exchange? Quarterly Journal of Economics, 124, 1095–1131.

    Article  Google Scholar 

  • Harrison, R., Mason, C., & Robson, P. (2010). Determinants of long-distance investing by business angels in the UK. Entrepreneurship & Regional Development, 22, 113–137.

    Article  Google Scholar 

  • Hau, H., & Rey, H. (2008). Home bias at the fund level. American Economic Review, 98, 333–338.

    Article  Google Scholar 

  • Hofstede, G. (1980). Culture’s consequences. Newbury Park: Sage Publications.

    Google Scholar 

  • Hofstede, G., Hofstede, G. J., & Minkov, M. (2010). Cultures and organizations: software of the mind (3rd ed.). New York: McGraw-Hill USA.

    Google Scholar 

  • Hong, H., Kubik, J. D., & Stein, J. C. (2004). Social interaction and stock-market participation. Journal of Finance, 59, 137–163.

    Article  Google Scholar 

  • Hortacsu, A., Martinez-Jerez, F. A., & Douglas, J. (2009). The geography of trade in online transactions: evidence from ebay and Mercadolibre. American Economic Journal: Microeconomics, 1, 53–74.

    Google Scholar 

  • Huberman, G. (2002). Familiarity breeds investment. Review of Financial Studies, 14, 659–680.

    Article  Google Scholar 

  • Ivković, Z., Sialm, C., & Weisbenner, S. (2008). Portfolio concentration and the performance of individual investors. Journal of Financial and Quantitative Analysis, 43, 613–655.

    Article  Google Scholar 

  • Ivković, Z., & Weisbenner, S. (2005). Local does as local is: information content of the geography of individual investors’ common stock investments. Journal of Finance, 60, 267–306.

    Article  Google Scholar 

  • Karlsson, A., & Nordén, L. (2007). Home sweet home: home bias and international diversification among individual investors. Journal of Banking & Finance, 31, 317–333.

    Article  Google Scholar 

  • Kim, K., & Viswanathan, S. (2014). The experts in the crowd: the role of reputable investors in a crowdfunding market. Available at SSRN : http://ssrn.com/abstract=2258243 .

  • Kolympiris, C., Seele, R., & Kalaitzandonakes, N. (2015). Geographic distance between venture capitalists and investees and the value of quality signals. Unpublished Working Paper.

  • Kuppuswamy, V., & Bayus, B.L. (2014). Crowdfunding creative ideas: the dynamics of project backers in Kickstarter. Available at SSRN : http://ssrn.com/abstract=223476 .

  • Lai, S., & Teo, M. (2008). Home-biased analysts in emerging markets. Journal of Financial & Quantitative Analysis, 43, 685–716.

    Article  Google Scholar 

  • Lee, S. Y. (2011). Why the accredited investor standard fails the average investor? Review of Banking & Financial Law, 31, 987–1013.

    Google Scholar 

  • Lerner, J. (1995). Venture capitalists and the oversight of private firms. Journal of Finance, 50, 301–318.

    Article  Google Scholar 

  • Lin, M., & Viswanathan, S. (2016). Home bias in online investments: an empirical study of an online crowdfunding market. Management Science, 62, 1393–1414.

    Article  Google Scholar 

  • Lipton, M. (1977). Why poor people stay poor: urban bias in world development. Cambridge, MA: Harvard University Press.

    Google Scholar 

  • Massa, M., & Simonov, A. (2006). Hedging, familiarity and portfolio choice. Review of Financial Studies, 19, 633–685.

    Article  Google Scholar 

  • Mollick, E. R. (2014). The dynamics of crowdfunding: determinants of success and failure. Journal of Business Venturing, 29, 1–16.

    Article  Google Scholar 

  • Mondria, J., & Wu, T. (2010). The puzzling evolution of the home bias, information processing and financial openness. Journal of Economic Dynamics and Control, 34, 875–896.

    Article  Google Scholar 

  • Moritz, A., & Block, J.H. (2016). Crowdfunding: a literature review and research directions. In: D. Brüntje, & O. Gajda (Eds.) Crowdfunding in Europe (pp. 25–53): Springer International Publishing.

  • Moritz, A., Block, J. H., & Lutz, E. (2015). Investor communication in crowdfunding: a qualitative-empirical study. Qualitative Research in Financial Markets, 7, 309–342.

    Article  Google Scholar 

  • Ordanini, A., Miceli, L., Pizzetti, M., & Parasuraman, A. (2011). Crowd-funding: transforming customers into investors through innovative service platforms. Journal of Service Management, 22, 443–470.

    Article  Google Scholar 

  • Parwada, J. T. (2008). The genesis of home bias? The location and portfolio choices of investment company start-ups. Journal of Financial & Quantitative Analysis, 43, 245–266.

    Article  Google Scholar 

  • Porter, M. E. (2000). Location, competition, and economic development: local clusters in a global economy. Economic Development Quarterly, 14, 15–34.

    Article  Google Scholar 

  • Powell, W., Koput, K., Bowie, J., & Smith-Doerr, L. (2002). The spatial clustering of science and capital: accounting for biotech firm-venture capital relationships. Regional Studies, 36, 291–305.

    Article  Google Scholar 

  • Rao, D. (2013). Forbes. http://www.forbes.com/sites/dileeprao/2013/07/22/why-99-95-of-entrepreneurs-should-stop-wasting-time-seeking-venture-capital/print/. Accessed 11 November 2015.

  • Schweizer, D. & Zhou, T. (2016). Do principles pay in real estate crowdfunding? Available at SSRN : http://ssrn.com/abstract=2846892 .

  • Schwienbacher, A., & Larralde, B. (2012). Crowdfunding of small entrepreneurial ventures. In D. J. Cumming (Ed.) The Oxford handbook of entrepreneurial finance (pp. 369–391). Oxford University Press.

  • Seasholes, M., & Zhu, N. (2010). Individual investors and local bias. Journal of Finance, 65, 1987–2010.

    Article  Google Scholar 

  • Sinnott, R. W. (1984). Virtues of the haversine. Sky and Telescope, 68, 159.

    Google Scholar 

  • Sohl, J. (1999). The early-stage equity market in the USA. Venture Capital, 1, 101–120.

    Article  Google Scholar 

  • Sorenson, O., & Stuart, T. (2001). Syndication networks and the spatial distribution of venture capital investments. American Journal of Sociology, 106, 1546–1588.

    Article  Google Scholar 

  • Sulaeman, J. (2014). Do local investors know more? Evidence from mutual fund location and investments. Quarterly Journal of Finance, 4, 1450010.

    Article  Google Scholar 

  • Teo, M. (2009). The geography of hedge funds. Review of Financial Studies, 22, 3531–3561.

    Article  Google Scholar 

  • Tesar, L., & Werner, I. (1995). Home bias and high turnover. Journal of International Money and Finance, 14, 467–492.

    Article  Google Scholar 

  • Tesar, L., & Werner, I. (1998). The internationalization of securities markets since the 1987 crash. Brookings-Wharton Papers on Financial Services, The Brookings Institution.

  • Van Nieuwerburgh, S., & Veldkamp, L. (2009). Information immobility and the home bias puzzle. Journal of Finance, 64, 1187–1215.

    Article  Google Scholar 

  • Vismara, S. (2016a). Equity retention and social network theory in equity crowdfunding. Small Business Economics, 46, 579–590.

    Article  Google Scholar 

  • Vismara, S. (2016b). Information cascades among investors in equity crowdfunding. Entrepreneurship Theory and Practice. Forthcoming.

  • Zook, M. (2002). Grounded capital: venture financing and the geography of the internet industry, 1994-2000. Journal of Economic Geography, 2, 151–177.

    Article  Google Scholar 

Download references

Acknowledgements

We thank two anonymous referees for their numerous highly useful comments and suggestions. We are also grateful to Jörn Block, Massimo Colombo, Douglas Cumming, Lars Hornuf, and Silvio Vismara and to Moein Karami for excellent research assistance, as well as the participants at Economics of Entrepreneurship and Innovation (Trier, Germany) for many helpful comments and suggestions. This project has been supported by the Social Sciences & Humanities Research Council of Canada (no. 435-2015-1495). Denis Schweizer gratefully acknowledges the financial support provided through the Manulife Professorship. We thank Paul Niederer from ASSOB for providing access to their databases.

Author information

Authors and Affiliations

  1. WHU—Otto Beisheim School of Management, Burgplatz 2, 56179, Vallendar, Germany

    Christina Guenther

  2. Schulich School of Business, York University, 4700 Keele Street M3J 1P3, Toronto, Ontario, Canada

    Sofia Johan

  3. John Molson School of Business, Concordia University, 1450 Rue Guy, Montréal, Québec, H3G 1M8, Canada

    Denis Schweizer

Authors
  1. Christina Guenther
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Sofia Johan
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Denis Schweizer
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Denis Schweizer.

Electronic supplementary material

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Guenther, C., Johan, S. & Schweizer, D. Is the crowd sensitive to distance?—how investment decisions differ by investor type. Small Bus Econ 50, 289–305 (2018). https://doi.org/10.1007/s11187-016-9834-6

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11187-016-9834-6

Keywords

JEL classification

Search

Navigation