Institutional Investors in Online Crowdfunding

The "crowd" in online crowdfunding is no longer only comprised of retail investors; in fact, debt-based crowdfunding or peer-to-peer lending has long attracted the interest of institutional investors. Given their expertise,... [ view full abstract ]

The "crowd" in online crowdfunding is no longer only comprised of retail investors; in fact, debt-based crowdfunding or peer-to-peer lending has long attracted the interest of institutional investors. Given their expertise, institutional investors are often referred to as "smart money" in financial markets. We study whether institutional investors are indeed better able to screen borrowers in the marketplace than, and have any significant impacts on the behaviors of, retail investors. We find that although institutional investors indeed behave differently in terms of portfolio size and diversification strategies, overall their portfolios do not necessarily outperform those of retail investors. Institutional investors' bids have significant impacts on the investment behavior of retail investors, as well as funding outcomes. We find that this effect is driven by the designation of "institutional investors" rather than just the size of their portfolios.