Soft and Hard Information and Signal Extraction in Securities Crowdfunding

Abstract

We examine the impact of information flows on financing and the relative roles of hard information, soft information, and certification of issuer quality by third parties, using novel evidence from the US securities-based crowdfunding market. While hard information about the issuer’s financial condition and experience has only marginal relevance for offering outcomes, third-party certification of issuer quality as well as soft information about the issuer proxied by social media following plays a significant role in crowdfunding offerings. The relative roles of hard information and certification are greatest in offerings of more information-sensitive securities and when investors are less likely to derive nonpecuniary returns from participating in an offering. Further, there is evidence of partial substitution between different signals of issuer quality. Both third-party certification and issuer social media following are positively related to the valuation obtained by the issuer. Issuers tailor deal features, specifically, the choice of funding target flexibility and offering duration, to the level of information asymmetry about issuer quality. Finally, there is some evidence of geographic matching, with issuer characteristics and local availability of platforms affecting distance between issuers and platforms.