Information Disclosure and Crowdfunding: An Empirical Analysis of the Disclosure of Project Risk and Market Reaction

Since information asymmetry between funders and creators is a critical issue in crowdfunding, many strategies have been introduced to dampen it and make markets more efficient and sustainable. In this research, we examine one... [ view full abstract ]

Since information asymmetry between funders and creators is a critical issue in crowdfunding, many strategies have been introduced to dampen it and make markets more efficient and sustainable. In this research, we examine one such possible mechanism, namely a platform-wide rule to require the disclosure of project risk, to assess whether and how disclosed risk information affects the behaviors of market participants. We examine this question on a popular crowdfunding site that has implemented a policy to mandate the disclosure of potential risk about projects. We find that the introduction of the new disclosure policy decreased the creation of new projects, even successful ones. Our additional analyses show that the effect is stronger for creators bearing a larger burden from the new disclosure requirement. Our online experiments imply that the decrease is partly driven by the negative perceptions of funders about the risk information disclosed, which discourages them from participating on the platform. Overall, our study
provides implications for disclosure policies in crowd-based marketplaces.
Keywords: Project Risk, Disclosure, Crowdfunding, Natural Experiment