The local bias in equity crowdfunding: Behavioral anomaly or rational preference?

Abstract

We use data on individual investment decisions to analyze whether investors in equity crowdfunding direct their investments to local firms and whether specific investor types can explain this behavior. We then examine whether investments exhibiting a local bias are more or less likely to fail. We show that investors exhibit a local bias, even when we control for those with personal ties to the entrepreneur. In particular, we find that angel-like investors and investors with personal ties to the entrepreneur exhibit a larger local bias than regular crowd investors. Well-diversified investors are less likely to suffer from this behavioral anomaly than investors with personal ties to the entrepreneur. Overall, we show that investors who direct their investments to local firms more often pick start-ups that run into insolvency, which indicates that some local investments in equity crowdfunding constitute a behavioral anomaly rather than a rational preference. Moreover, our results reveal that platform design is an important factor determining the scope of the behavior anomaly.

Attention across borders: Investor attention as a driver of cross‐border equity crowdfunding investments

“…Interestingly, national distance dimensions (geographic, institutional, cultural, and linguistic distance) had very limited effects on cross‐border equity investors' investment choices. These results are in line with similar findings by Guenther et al (2018) and Hornuf et al (2020) concerning geographic distance and extend their findings by also incorporating institutional, cultural, and linguistic distance.…”

“…Equity crowdfunding is a rapidly growing form of entrepreneurial finance that complements business angels, VC investors, and other traditional forms of entrepreneurial finance (Block, Colombo, et al, 2018; Drover et al, 2017; Hornuf & Schwienbacher, 2016; Vulkan, Åstebro, & Sierra, 2016). Following the growth of the industry, scholarly research on equity crowdfunding has rapidly developed, seeking to understand the antecedents (e.g., Ahlers, Cumming, Günther, & Schweizer, 2015; Bapna, 2019; Lukkarinen et al, 2016; Piva & Rossi‐Lamastra, 2018; Vismara, 2018; Walthoff‐Borm, Schwienbacher, & Vanacker, 2018), outcomes (e.g., Blaseg, Cumming, & Koetter, 2021; Hornuf, Schmitt, & Stenzhorn, 2018; Signori & Vismara, 2016, 2018; Walthoff‐Borm, Vanacker, & Collewaert, 2018), and contextual determinants (e.g., Estrin, Gozman, & Khavul, 2018; Hornuf, Schmitt, & Stenzhorn, 2020; Hornuf & Schwienbacher, 2017; Kshetri, 2018) of equity crowdfunding investments.…”

The Performance of Socially Responsible Investments: A Meta-Analysis

“…As stated previously, screening for socially responsible assets increases search and monitoring costs. These costs can be reduced when investors are geographically close to an asset, because geographic closeness reduces the costs of screening (Cumming & Dai, 2010;Hornuf et al, 2022). Thus, local investments in SRI could ultimately generate better performance.…”

Secondary Market Listings in Equity Crowdfunding: The Missing Link?

“…We introduce previous retractions to control for the number of previously ended successful campaigns that had listing plans but did not list. Consistent with previous literature, we add controls for the funding target, the funding ratio, company orientation (B2B or B2C), company age, whether each company had secured funding from a professional investor (business angel or VC), the fraction of equity offered in the campaign as free float, campaign duration, the minimum investment accepted in the campaign, the number of words on the campaign page, the company's team size as presented on the campaign page, whether the company had previously conducted a successful equity crowdfunding campaign (previous success), the social media activity around the campaign, the number of simultaneous campaigns ongoing on the platform, and whether the company was located outside the home country of the platform and secondary market (foreign campaign) (Ahlers et al, 2015;Günther et al, 2018;Hornuf et al, 2022;Hornuf and Schwienbacher, 2018;Johan and Zhang, 2020;Lukkarinen et al, 2016;Ralcheva and Roosenboom, 2020).…”

“…We include a novel control denoting whether each investment was made as a gift to another person and a control for the number of available campaigns on the platform on the day of the investment (Hornuf and Schwienbacher, 2018). We further include investor-level controls for investor gender, investor age, whether each investor invested as a legal entity or a private person (proxying for investor experience and sophistication), whether the investor had earned key investor status on the focal platform (typically earned by people who have invested over 10,000 euros; thus, this is a proxy for large investors), average income per resident in the investor's zip code area (investor income), whether the investor was located in the company city (to account for local bias), and whether the investor was located in a capital city (to account for large-city effects) (Günther et al, 2015;Günther et al, 2018;Hervé et al, 2019;Hornuf et al, 2022;Wallmeroth, 2019). All the variables are defined in Table 1.…”