The Effect and Impact of Signals on Investing Decisions in Reward-Based Crowdfunding: A Comparative Study of China and the United Kingdom

Sardar Muhammad Usman,Daniel Badulescu,Farasat Ali Shah Bukhari,Darie Gavrilut,Huiwei You

doi:10.3390/jrfm13120325

Abstract

When traditional financial institutions faced difficulties in the task of assisting micro, small and medium-sized enterprises (MSMEs) with capital allocations, crowdfunding can upsurge as an innovative and vibrant vehicle that can support and assist the activity of such MSME’s, by financing their activity and instrumenting the process of risk-sharing. Simultaneously with its enormous growth and popularity, crowdfunding is faced by several key challenges, one of biggest such challenges referring to the problem of information asymmetry that can exist between fundraisers and potential backers. Based on the signaling theory, a research taxonomy has been developed for a comparative analysis between China and the UK. This has been accomplished by retrieving secondary data from the following crowdfunding platforms: Dreamore (Chinese platform) and Crowdfunder (UK platform). The objective of the study is to investigate both the effect and the impact that signals (goal setting, project comments and updates) have upon mitigating the problem of information asymmetry, in order to make the project successful. We have thus deployed an Ordinary Least Square (OLS) regression and validated the models through a robustness check. The findings reveal that signals actively mitigate the problem of information asymmetry in both countries, but this varies in the sense that higher goal setting has a more positive/impactful relationship with project success in the UK than it does in China. Project comments are more positively associated with project success in China as compared to the UK, whereas project updates are more negatively related to project success in China as compared to the UK. These findings demonstrate the importance that signals have upon successful crowdfunding activities/campaigns, highlighting the theoretical and practical influence and relevance for potential fundraisers in the two aforementioned economies.

Highlights

The creation of employment opportunities for individuals at a large scale, even at a global level, together with uplifting the economies of developing and developed countries alike, have at their core the micro, small and medium-sized enterprises (MSMEs)
Even if their impact is quite large, as according to Abraham and Schmukler (2017), regardless of MSME’s substantial and ever-increasing role in the improvement and development of economies, access to financial support is comparatively low, as compared to the ease of access manifested by large scale businesses
Such MSMEs are considered as “born to be young” companies, because to a certain extent, such companies are immature, have inadequate borrowing records, and have no apparent informational opacity. Such companies have made up 37% of the world market in 2018, whereas in Europe and the United States, such companies accounted for 18% and 33% of those respective markets. It is speculated by the World Bank that by the end of 2025, the developing economies would raise roughly $ 96 billion in financing from the crowdfunding market, out of which $ 50 billion would come from the Chinese crowdfunding market; what is more, such figures would be accompanied by a rise in the number of female investors and fundraisers (World Bank 2013)

Summary

Introduction

The creation of employment opportunities for individuals at a large scale, even at a global level, together with uplifting the economies of developing and developed countries alike, have at their core the micro, small and medium-sized enterprises (MSMEs). The reasoning behind the previous statement refers to the importance of MSMEs, given that they are considered as being the key contributors in a scenario where emphasis is placed upon the creation and development of employment opportunities (Huang et al 2018) Even if their impact is quite large, as according to Abraham and Schmukler (2017), regardless of MSME’s substantial and ever-increasing role in the improvement and development of economies, access to financial support is comparatively low, as compared to the ease of access manifested by large scale businesses.

Objectives

Methods

Results