Costly and Costless Signals and the Role of Innovativeness in Equity Crowdfunding

Abstract

Uncertainty and information asymmetries in crowdfunding can be reduced through quality signals project proponents offer to their potential supporters. Drawing on the signaling theory, this study analyzes how costly signals –venture’s statements on past achievements and results- and costless signals –venture’s statements on future plans and goals– influence crowdfunding performance. The results of a multi-method study on 602 UK equity crowdfunding campaigns suggest that only costly signals increase the amount raised through crowdfunding, while the presence of costless signals produces a negative effect. However, for companies introducing radical innovations the use of costless signals is not punished by the crowd.