Follow the Crowd: How Social Information and Social Identity Influence Investing Decisions

Abstract

Increasingly, jurisdictions around the world have been enacting standards that formally allow organizations to offer equity using the crowdfunding model. Using the Internet, the crowdfunding model raises capital by soliciting from a large number of people (i.e., the crowd). A key feature of crowdfunding that has been embraced by regulators is the use of social information to inform investors as a safeguard for this type of investing. However, research has not yet explored how investors utilize this information. In this study, I investigate whether social information can shift investors away from financial maximization goals. Social identity theory predicts that people can be provoked to act as representatives of their group, setting aside individual interests. I predict, and find, that positive social information focused on an equity crowdfunding organization can activate the social identity of investors who share an identity with that organization, causing them to invest more in a relatively weak organization. In a moderated mediation analysis, I find that positive social information provokes investors who share an identity with an organization to feel a stronger connection to that organization, leading them to increase investment. In addition, I explore whether investors’ perceptions of negative social information are moderated by their social identity. I find that investors who are deeply committed to an identity shared with an organization experiencing negative social information will defensively invest in that organization. The findings of this study will be of interest to investors, regulators, and crowdfunding organizations.

The Role of Entrepreneurial Intentions, Perceived Risk and Perceived Trust in Crowdfunding Intentions

“…The US opened the gate in terms of CF enactment through the JOBS Act in 2012. Later on, other developed economies created the adequate legal framework for CF operation (Kuselias, 2020). Recently, the EU has adopted the Regulation on European Crowdfunding Service Providers (ECSP) for business (European Commission, n.d.).…”

On the emergence of identity economics: a review

“…When the investors are primed for a certain identity shared by one of the crowdfunding companies, the social information available about the company becomes more attractive to the investors, who then become more willing to invest into that option even if that means foregoing the financially more lucrative option due to the shared values and identity causing strengthened commitment. This effect is also observed when negative social information is shared, in which case there is a defensive investment taking place by the investors sharing the identity with the company (Kuselias, 2020).…”

Analysts’ Earnings per Share Forecasts: The Effects of Forecast Uncertainty and Forecast Precision on Investor Judgements

“…This pool of participants represents suitable proxies for non-professional investors. In particular, AMT has been used in prior research studying non-professional investors (e.g., Rennekamp, 2012;Koonce et al, 2015;Kuselias, 2020), and has been demonstrated to replicate results obtained in existing accounting studies (Krische, 2015). Prior studies suggest that including attention check questions in experimental studies using AMT subjects are an effective way to determine if participants pay sufficient attention when completing experiments (e.g., Oppenheimer et al, 2009;Hauser and Schwarz, 2016).…”