Round number heuristic in equity crowdfunding

Abstract

Since the beginning of the 2000's, equity crowdfunding has emerged as a new avenue for founders to finance their ventures. This has attracted researchers to study the campaign factors that affect the criteria used by investors when investing in equity crowdfunding. Humans have been found to prefer the use of imprecise round numbers and the phenomenon has been also found in the financial markets. Therefore, as a novel research topic I study the effect of the round number heuristic on setting campaign targets, the success of equity crowdfunding campaigns and the success of companies thereafter.

My data sample covers 263 equity crowdfunding campaigns from April 2012 to December 2019 listed on the leading Nordic equity crowdfunding platform Invesdor. Campaigns are carried out based on the "all or nothing" model in which a predetermined minimum funding target needs to be met or else funds are returned to investors. I measure campaign success with multiple variables of which the primary one is a dummy variable taking the value of one if the target is reached and zero otherwise.

I find strong support for equity crowdfunding campaigns goals being clustered around round integers in line with findings in reward-based crowdfunding and many other strands of finance literature. However, I do not find sufficient evidence of round campaign goals affecting the success rate of campaigns, number of investments made to campaigns or the amount of capital pledged to a campaign. The results are robust to multiple definitions of campaign goal roundness and the use of multiple control variables.

The data sample for the analysis is not too broad when compared to Lin and Pursiainen (2019) who analyse over 300 000 reward-based campaigns. Thus, further research into the subject with a larger data set is warranted to validate my findings. Possible other reasons for the absence of the round number heuristic affecting campaign success in my thesis could be the partly institutional and highly educated investor base of Invesdor, as well as the significantly larger economical risk born by equity crowdfunding investors as opposed to reward-based crowdfunding investors.