Economic Consequences of Risk Disclosures: Evidence from Crowdfunding

• In Event: Voluntary Disclosure - Non-Earnings Information

Abstract

Crowdfunding platforms offer a novel form of financing for early-stage ventures, yet are largely unregulated and characterized by severe information asymmetries and agency costs. We exploit the addition of risk disclosures on the popular crowdfunding website Kickstarter.com to examine their effect on individuals’ behavior. We document that project creators with high-risk projects, relative to creators with low-risk projects, are more likely to provide higher-quality disclosures and design a project structure that accommodates greater risk and uncertainty after the introduction of risk disclosures. We further document that risk disclosures result in improved funding outcomes for highrisk projects, particularly when project creators combine their discussion of risks with an increased emphasis on their abilities. Our findings suggest that project creators’ behavior changes and crowdfunding outcomes subsequently improve when risks are disclosed.

Authors

• Joshua Madsen, University of Minnesota

• Jeff Lawrence McMullin, Indiana University - Bloomington