Risk Disclosure in Crowdfunding

Abstract

How should crowdfunding platforms alleviate information asymmetry between creators and crowdfunders? In traditional financial markets, public companies are required to disclose potential risks to their investors, and such risk disclosure requirements are enforced by legal and fiduciary regulations. In the crowdfunding context, however, such information asymmetry concerns are often addressed by crowdfunding platforms. In this study, we examine whether and how a regulation to increase the salience of project risks in crowdfunding affects crowdfunders’ funding decisions. We find that increasing the awareness of project risks is associated with inferior funding outcomes of crowdfunding projects, and the effect exists mainly for high-risk projects but not much for low-risk projects. In addition, high-risk projects benefit from a risk disclosure with relevant information, authentic language, and balanced tones that are not overly negative or optimistic. Despite the negative short-term effects, technology funders tend to interpret risk disclosures rationally over time, suggesting a positive long-term effect. Implications for research and insights for practitioners are discussed, particularly the fact that disclosure policies may make crowdfunding markets more sustainable by reducing information asymmetry and helping crowdfunders make more informed decisions.