The Independent and Combined Effects of External Endorsements on Equity Investments: Evidence from a Randomized Field Experiment

Abstract

This study employs a randomized field experiment to causally identify which signals of external endorsement are most important to equity investors in early stage firms. The three external endorsements examined are: product certification by expert intermediaries; affiliation with prominent others; and social proof, that is, others’ interest in investing in a particular venture. The study, in the context of equity crowdfunding, randomly assigns who is able to view these endorsements and their combinations to make causal inferences about their impact. I find that experienced investors who were able to view the combined product certification and prominent affiliate signals have a 72% higher likelihood of indicating an interest in investing, than those who received no signal. Similarly, experienced investors who were able to view the combined product certification and social proof signals have a 65% higher likelihood of indicating an interest in investing. This suggests that experienced investors follow others (the crowd or high status others) when they have a concrete signal of quality. In contrast, for inexperienced investors, I find that the three endorsements and their combinations are not significantly associated with interest in investing, suggesting a lack of agreement in this group about what factors identify a high potential venture.