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Does the Role of Media and Founder’s Past Success Mitigate the Problem of Information Asymmetry? Evidence from a UK Crowdfunding Platform

Authors: 

Sardar Muhammad Usman, Farasat Ali Shah Bukhari, Muhammad Usman*, Daniel Badulescu and Muhammad Safdar Sia

Source title: 
Sustainability, 11(3): 692, 2019 (ISI)
Academic year of acceptance: 
2019-2020
Abstract: 

Crowdfunding is an innovative concept for a new start-ups seeking financial support for their distinctive and novel projects. Despite their popularity, crowdfunding platforms face several key challenges amongst which is information asymmetry between entrepreneurs and influential backers, where credible information must be disclosed by the founders (entrepreneurs) to the potential “backers” in order to assess the potentiality of the project. In order to fill this gap, we developed and tested a model that examines the signaling interaction between the founder and a potential backer through media and the founders’ past success. This model also examines how these two signals (i.e., media and past success) interact so as to mitigate the problem of information asymmetry and to make the project successful. A total of 14,887 projects were extracted from a reward-based platform named Crowdfunder. The data was analyzed by performing Tobit and logistic regression and the model was validated by using the robustness technique. The results strongly mitigate the problem of information asymmetry which improves the rate of success in projects floated on the Crowdfunder platform. We believe that our study will significantly contribute to this nascent yet developing research area by probing for information mechanisms to succeed in crowdfunding.