Good News from Mass Media Induces More Investments in the Equity Crowdfunding Market.
| Autor | Felipe, Israel Jose dos Santos |
INTRODUCTION
Crowdfunding constitutes a way for businesses and other organizations to raise funding from multiple individuals (Mochkabadi b Volkmann, 2020; Stevenson et al., 2019). Thus, as an extension of classic funding from family and friends, crowdfunding uses communities (especially online communities) to raise money to finance projects. International organizations have seen crowdfunding as a path to world development, especially in terms of less developed markets (World Bank, 2013). One form of crowdfunding involves entrepreneurs making an open call to sell a specific quantity of equity, or convertible shares of equity for a company on the internet. This form is known as equity crowdfunding (Blaseg et al., 2021), henceforth called ECF.
Only a limited number of startups are able to obtain external capital from venture capital firms and angel investors (Clarke, 2016), especially when we are considering ventures that are led by entrepreneurs who do not have sufficient funds to develop their businesses. High growth potential ventures tend to resort to external financing for the development of their activities (Ahlers et al., 2015). External capital plays a vital role for these companies, because with the raising of funds these businesses need to meet conditions that have to be initiated or expanded (Estnn et al., 2018). To Ahlers et al. (2015), ECF is developing because it has managed to overcome legal obstacles in various countries, especially emerging countries, in which financial mechanisms tend to be less developed.
Filling the very large funding gap that exists in typical emerging markets for startups and SMEs is something that has motivated ECF platforms in these economies. Yet in a country struggling with economic, political, and social challenges, how does an ECF platform become part of the solution in filling the funding gap where regulations stifle business startups and investments (7) This question is related to a study of the determinants of the propensity of investors to invest in an ECF platform, with special interest in economies in which financial mechanisms are less developed and bureaucratic, e.g., emerging economies. The literature regarding the disposition of investors to place their resources in ECF is still sparse (Shaft, 2019), and apparently mexistent in terms of examining investor sentiment and geographic attributes.
The popularization of ECF has led to empirical studies of it, and initial impressions of this market are appearing more and more often. Thus, its general economic aspects (Agrawal et al., 2011), market mechanisms (Hornuf b Schwienbacher, 2018), the success of projects (Ralcheva b Roosenboom, 2020), and the social relationships of funding (Piva b Rossi-Lamastra, 2018) are all examples of areas that have been the subject of recent studies of this collective method of fundraising for small innovative companies.
According to Tetlock (2007), the narratives provided by the media can play an important function in the market because they spread information, reducing the tension due to the asymmetry of information and agency problems. In addition, the fact that this information is not directly linked to the companies gives it a certain degree of credibility to investors (Kothan et al., 2009). Thus, it is believed that the news can communicate interesting information about the decision-making process related to the allocation of investments, especially on investor behavior (Hornuf b Schwienbacher, 2018; Tiberius b Hauptmeijer 2021).
Studies that investigate text sentiment point to indications that news in the media can provoke reactions in the market (Tetlock, 2007). Stevenson et al. (2019) reinforce our idea when they concluded that investor opinions can increase or reduce the probability of successful startup financing, serving as a kind of decoy, called by the authors 'crowd bias.' Moreover, Griffin et al. (2011) indicate that the narratives in the media can play a role of considerable importance in estimating the fundamental values of assets. That is to say, the news can be implemented to regulate the beliefs of investors regarding the value of a company or its assets. Thus, optimistic or pessimistic news should be capable of influencing the market (Liu b McConnell, 2013).
Geographic attributes, or in other words, the characteristics associated with the location of these projects (Foster et al., 2019) and the distance between the venture and the investor (Agrawal et al., 2011), may be capable of interfering in the disposition of investors to place their capital in projects that seek this alternative mode of fundraisrng. Breznitz and Noonan (2020) claim that in reward crowdfunding, the projects that are most likely to receive resources are those most grouped around the same physical proximity revealing that the allocation of capital in this modality of crowdfunding may be dependent on a geographical grouping of enterprises. So far, the literature on the influence of geography on the dynamics of capital allocation in ECF is not well defined, which motivated us to research it. Hornuf and Schwienbacher (2018) support the idea that research on crowdfunding should direct attention to matters that are still little explored and capable of influencing the successes and failures of ventures, which are particularly important for the maturing of this type of credit granting for startups.
The geographic distribution of ECF projects itself may exhibit a concentration of ventures in areas that are more developed economically (Mollick b Robb, 2016), which could be justified in part by the element of risk in the operations that take place in this market. According to Agrawal et al. (2011), financiers can evaluate a venture's fundraismg capacity based on its location. The use of geography in studies of financial relationships can provide useful information on the economic and social development of certain areas, as well as reveal elements of social culture and innovation (Battaglia et al., 2022; Florida, 2002). Geography can indicate which ECF areas are capable of receiving greater investment and, as a result, have greater chances of success.
With support from these arguments, it is reasonable to assume that the text sentiment of news items, as well as geography, can influence the value of financial investments in ECF ventures. In this sense, the objective of this study is to verify the associations between the value of capital investments in the ECF market and the text sentiment of news items and the geography of the investments made, and with that in mind we decided to use data for over 700 investments in an ECF platform as well as mass media news items and the geographic characteristics of the locations where these projects are centered.
LITERATURE REVIEW
Asymmetry of information is a characteristic problem with startup ventures (Clarke, 2016; Meoli b Vismara, 2021), and most of the time entrepreneurs have greater clarity in terms of the quality of the business they are presenting than the investors do (Sood, 2003). In addition, various levels of information among those involved in the funding process can result in adverse selection, making it difficult for the entrepreneurs and the investors to evaluate the business (Amit et al., 1998).
According to the efficient markets hypothesis (EMH), new information should regulate the expectations of investors in relation to the gams to be made from future cash flow--and the behavior of investors will be based on the adjustment of prices through this new information. Thus, soon estimates of asset prices in equilibrium should be made based on expected returns (Fama, 1991). However, more recent studies, like Hong et al. (2007), have emphasized the limited rationality of individuals. According to these authors, people are averse not only to risk, but also to losses, and this notion is relevant when we are dealing with a market made up of companies that are not well known.
Hirshleifer et al. (2009) tested the capacity of investors to manage the volume of information available through the publication of news items on the financial market and concluded that news not related to the industry and surprises in terms of gains exert a more intense distracting effect, inhibiting market reactions to more relevant news. According to Solomon (2012), the control of the volume of good and bad news is conducted by the media itself, or, in other words, the premise that investors can access and process all useful information (at no cost) could be compromised. This author believes that, in disseminating information through media coverage, the press plays a fundamental role in determining investor expectations.
In this way, the content published by the media tends to affect asset prices and investor behavior and provokes a market reaction. Negative news about a company, product, or service can affect investment intentions regarding a given collective venture, just as a positive news item about a given investment opportunity can encourage investors to participate in a crowdfunding campaign (Clarke, 2016).
ECF investors seek the information that is available regarding potential investment opportunities to reduce possible problems related to the asymmetry of information (Ahlers et al., 2015; Kukk, 2022). The level of information available to investors can influence the perception of risk involved in a business (Courtney et al., 2017), and it is therefore an element that is seriously considered by venture capital and angel investors (Cummmg et al., 2021a) as well as ECF investors (Block et al., 2018; Lukkannen et al., 2022) when making the decision to allocate their financial resources.
The decision to invest in ECF involves a high degree of risk, therefore it requires investors to seek out and process information about the business from the entrepreneur as well as other sources (Amit et al., 1998; Meoli b Vismara, 2021). Given these considerations, it is...
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