Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending

Abstract

We study the online market for peer-to-peer (P2P) lending, in which individuals bid on unsecured microloans sought by other individual borrowers. Using a large sample of consummated and failed listings from the largest online P2P lending marketplace, Prosper.com, we find that the online friendships of borrowers act as signals of credit quality. Friendships increase the probability of successful funding, lower interest rates on funded loans, and are associated with lower ex post default rates. The economic effects of friendships show a striking gradation based on the roles and identities of the friends. We discuss the implications of our findings for the disintermediation of financial markets and the design of decentralized electronic markets. This paper was accepted by Sandra Slaughter, information systems.

The wisdom of the crowd in funding: information heterogeneity and social networks of crowdfunders

“…Several scholars (Agrawal et al 2015;Belleflamme et al 2014;Lin et al 2012;Mollick 2014;Ordanini et al 2011;Vismara 2016a) show that the size of a founder's social network is positively associated with the capital raised for a project and the subsequent success of the project in both reward-based and equity crowdfunding; this effect does not hold in a donation-based setting (Burtch et al 2013;Kuppuswamy and Bayus 2015). Furthermore, the relationship between funders and project creators affects investment sequencing through information cascades.…”

“…Individual funders possess different levels of information; hence, some investors have an advantage over others (Cumming et al 2015a;Hildebrand et al 2016). When professional investors with industry experience and track record enter relatively early in a crowdfunding campaign, their public visibility attracts other investors (Vismara 2016b), in a similar way as in other online market places (Dellarocas 2003;Lin et al 2012). This suggests that the quality indication process with crowdfunding is staged, with an in-crowd to out-crowd sequence, using different types of information and levels of expertise to make a funding decision.…”

“…Much of this literature focuses on success factors driving crowdfunding campaigns, such as the role of early contributions (Agrawal et al 2015;Cholakova and Clarysse 2015;Colombo et al 2015). There is also considerable attention on the role of social networks in crowdfunding (Agrawal et al 2015;Horvát et al 2015;Hui et al 2 0 1 4 ) a n d o n o v e r c o m i n g i n f o r m a t i o n a l asymmetries (Ahlers et al 2015;Lin et al 2012;Vismara 2016b). Lacking attention until now is the bridge between these two topics, namely, how social networks affect the type of information used by investors in crowdfunding decision making.…”

Access to the Internet and Access to Finance: Theory and Evidence

“…In fact, financing difficulty of small and micro businesses is universal across the world for both developing and developed countries, which has been documented by substantial research [6][7][8][9]. On the other hand, rare literature directly explores the relationship between the use of the Internet and individual or firms' access to external finance, although a strand of literature [10][11][12][13][14][15] has investigated the influence of online peer-to-peer lending as an appealing new channel of financing on people's economic behavior. This study attempted to fill the void in the environment of an emerging economy, China.…”

Pricing shares in equity crowdfunding

“…Prior studies on Internet-based entrepreneurial finance have mainly focused on donation-based crowdfunding (Bøg et al 2012;Burtch et al 2013;Koning and Model 2013;Meer 2014;Saxton and Wang 2014), reward-based crowdfunding (Agrawal et al 2013;Belleflamme et al 2014;Colombo et al 2015;Kuppuswamy and Bayus 2014;Marom and Sade 2013;Mollick 2013Mollick , 2014Younkin and Kashkooli 2013;Zvilichovsky et al 2013), and crowdlending (Burtch et al 2014;Lin et al 2012;Lin and Viswanathan 2013). In one of the first studies on equity crowdfunding, Agrawal et al (2013) analyze the revenue-sharing model of Sellaband.…”