Lead investors' insider ownership and crowd investors' agency concerns in investor-led equity crowdfunding

Abstract

This study examines how crowd investment in investor-led equity crowdfunding is influenced by professional lead investors who act as an agent to lead the fundraising and manage the syndicate on behalf of the principal - crowd investors. Complementing existing equity crowdfunding research where the dominant view of professional endorsement is positive signaling, we apply agency theory and argue that concentrated insider ownership by a lead investor limits crowd investors' bargaining power, increasing agency concerns of potential exploitation. Consistent with this argument, this paper finds that high capital contribution by the lead results in less subsequent crowd investment. We also extend the agency theory by embedding trust in the analysis of the lead and crowd relationship. We find that the level of trust reduces the crowd's insider ownership concerns and moderates the negative impact on fundraising. In contrast to lead investors, capital contribution from early peers attracts follow-on crowd investment. The investor-led model is advocated as the future of equity crowdfunding and crowd investors are encouraged to free ride on the decisions of lead investors. This study brings attention to the costs of investing along with lead investors and provides the first empirical evidence on whether they indeed inject investment confidence.