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The local bias in equity crowdfunding: Behavioral anomaly or rational preference?

The local bias in equity crowdfunding: Behavioral anomaly or rational preference? We use data on individual investment decisions to analyze whether investors in equity crowdfunding direct their investments to local firms and whether specific investor types can explain this behavior. We then examine whether investments exhibiting a local bias are more or less likely to fail. We show that investors exhibit a local bias, even when we control for those with personal ties to the entrepreneur. In particular, we find that angel‐like investors and investors with personal ties to the entrepreneur exhibit a larger local bias than regular crowd investors. Well‐diversified investors are less likely to suffer from this behavioral anomaly than investors with personal ties to the entrepreneur. Overall, we show that investors who direct their investments to local firms more often pick start‐ups that run into insolvency, which indicates that some local investments in equity crowdfunding constitute a behavioral anomaly rather than a rational preference. Moreover, our results reveal that platform design is an important factor determining the scope of the behavior anomaly. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics & Management Strategy Wiley

The local bias in equity crowdfunding: Behavioral anomaly or rational preference?

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References (87)

Publisher
Wiley
Copyright
© 2022 Wiley Periodicals LLC.
ISSN
1058-6407
eISSN
1530-9134
DOI
10.1111/jems.12475
Publisher site
See Article on Publisher Site

Abstract

We use data on individual investment decisions to analyze whether investors in equity crowdfunding direct their investments to local firms and whether specific investor types can explain this behavior. We then examine whether investments exhibiting a local bias are more or less likely to fail. We show that investors exhibit a local bias, even when we control for those with personal ties to the entrepreneur. In particular, we find that angel‐like investors and investors with personal ties to the entrepreneur exhibit a larger local bias than regular crowd investors. Well‐diversified investors are less likely to suffer from this behavioral anomaly than investors with personal ties to the entrepreneur. Overall, we show that investors who direct their investments to local firms more often pick start‐ups that run into insolvency, which indicates that some local investments in equity crowdfunding constitute a behavioral anomaly rather than a rational preference. Moreover, our results reveal that platform design is an important factor determining the scope of the behavior anomaly.

Journal

Journal of Economics & Management Strategy – Wiley

Published: Aug 1, 2022

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