Effect of Voluntary Audit, Firm Response, and Non-GAAP Emphasis on Nonprofessional Investor Decision Making in the Equity Crowdfunding Environment

• In Event: Break and Research & Education Poster Forum

Abstract

While the JOBS Act expanded the ability of startups to raise equity crowdfunding capital, concerns have been raised about nonprofessionals’ ability to evaluate such offerings. In a 2x2x2 experiment, we examine how two novel crowdfunding disclosure choices, the level of attestation of the finacial statements (audit or review), and the nature of management’s responses to online questions (detailed or vague) can interact with financial projection format used by startups (GAAP or non-GAAP emphasis) to impact nonprofessionals’ investment decisions. When the information environment is weaker due to managemnet’s vague responses to questions, nonprofessionals invest more when GAAP versus more favorable non-GAAP metrics are emphasized, given weaker assurance due to a mandatory review. When the information environment is stronger due to detailed responses, investors invest more when non-GAAP versus GAAP metrics are emphasized, but only when the firm also chooses stronger assurance (a voluntary audit). Findings suggest nonprofessionals use more sophisticated valuation models, where a particular crowdfunding firm’s choice of level of attestation of the financial statements can impact how investors utilize projections presented with ethier GAAP or non-GAAP metrics.

Authors

• Ian Twardus, Murray State University

• Sudip Bhattacharjee, Virginia Tech