Equity crowdfunding, market timing, and firm capital structure

Abstract

Finance studies on the impact of market timing (or "windows of opportunity") have almost exclusively focused on publicly traded firms and initial public offering (IPO) firms. We provide first-time evidence on the impact of market timing on the capital structure of private firms that raise initial equity crowdfunding (ECF). We capture market timing by differentiating between ECF campaigns launched in hot markets, characterized by high ECF volumes, versus cold markets. Our sample includes firms financed via either Crowdcube or Seedrs, the two largest UK ECF platforms. Consistent with the idea of hot markets serving as windows of opportunity, we find that in hot markets, ECF firms set higher targets, collect more overfunding, and thus raise more equity capital than ECF firms in cold markets. Surprisingly, however, and inconsistent with a market timing theory of capital structure, we fail to find differences between the leverage ratios of hot and cold market firms from the year of the ECF campaign. This finding is explained by hot market ECF firms contemporaneously rebalancing their capital structure by attracting more debt, especially financial debt. We discuss the theoretical and practical implications of these findings.

Navigating the crowdfunding landscape: a study of knowledge trajectories based on main path analysis

“…Four articles focus on equity CF and its impact on the reputation of follow-on venture capital investors, as well as the impact of market timing on the capital structure of private firms that raise the initial equity through CF (Buttice et al. , 2022; Buttice and Vismara, 2022; Cerpentier et al. , 2022; Cumming et al.…”

“…After Walthoff-Borm et al (2018a,b), the backward local main path includes twelve papers which also appear in the forward local main path. Four articles focus on equity CF and its impact on the reputation of follow-on venture capital investors, as well as the impact of market timing on the capital structure of private firms that raise the initial equity through CF Buttice and Vismara, 2022;Cerpentier et al, 2022;Cumming et al, 2019). Cappa et al (2021) and Kleinert and Mochkabadi (2022) study the dynamics and critical success factors of CF, while Block et al (2021) and Meoli et al (2022) focus broadly on the governance and regulatory environment of CF.…”

Signalling Strategy and Success of Crowdfunding Campaign

“…External resource providers find it difficult to assess the quality of a start-up. In the context of crowdfunding as a novel source for funding new ventures, problems of information asymmetries are more severe than in other entrepreneurial finance markets (Cerpentier et al, 2021). Indeed, crowdfunding investors cannot do face to face due diligence and find sufficient, correct and easily accessible information (Baucus and Mitteness, 2016;Cumming et al, 2021).…”

COVID-19 and Entrepreneurial Processes in U.S. Equity Crowdfunding

“…Electronic copy available at: https://ssrn.com/abstract=3934088 P r e p r i n t n o t p e e r r e v i e w e d 4 Koetter, 2020). Entrepreneurs have to effectively signal their ability and the business opportunity or risk raising no funding at all (Ahlers, Cumming, Guenther, & Schwienbacher, 2015;Philippi, Schuhmacher, Bastian, 2021;Cerpentier, Vanacker, Paeleman, & Bringman, 2021;Johan & Zhang, 2021), and the effectiveness of these signals depends on investor characteristics (Kleinert & Mochkabadi, 2021). Entrepreneurs can make use of social media to influence success (Datta, Sahaym, & Brooks, 2019).…”