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Home bias in online investments: An empirical study of an online crowdfunding market
Abstract
An extensive literature in economics and finance has documented home bias, the tendency that transactions are more likely to occur between parties in the same geographical area rather than outside. Using data from a large online crowdfunding marketplace and employing a quasi-experimental design, we find evidence that home bias still exists in this virtual marketplace for financial products. Furthermore, through a series of empirical tests, we show that rationality-based explanations cannot fully explain such behavior and that behavioral reasons at least partially drive this remarkable phenomenon. As crowdfunding becomes an alternative and increasingly appealing channel for financing, a better understanding of home bias in this new context provides important managerial, practical, and policy implications.
... Burtch et al. (2014) found that lenders prefer to fund physically and culturally proximate beneficiaries in prosocial lending. Lin and Viswanathan (2015) showed the presence of "home bias'', wherein lending transactions were more likely to occur between colocated parties. Similarly, Agrawal et al. (2015) found that funders colocated with beneficiaries behave differently from distant funders, perhaps given that colocation creates social ties. ...
... The article gives empirical evidence affirming that lenders prefer to fund culturally alike and geographically closer borrowers. Lin & Viswanathan (2015) Motivated by home bias in financial transactions in an offline setting, this paper argues for the presence of the same in an online crowdfunding setup. ...
... First, our work contributes to the literature on prosocial behavior, namely, studies examining the beneficiary's location as an antecedent of donation outcomes. While prior work in allied settings has reported the importance of the beneficiary's location, the emphasis is usually placed on dyadic location measures such as different distances between donors and beneficiaries (Burtch et al., 2014) and home bias (Lin & Viswanathan, 2015). We extend this literature by showing that a beneficiary's colocation with a crisis shifts the probability of the beneficiary securing the desired funds. ...
In this study, we examine how a project owner’s colocation with a crisis influences the chances of their project securing requisite funding. Our study draws upon and extends several streams of work, particularly the importance of owners’ location and the role of crisis in online prosocial behavior, namely online donations. Further, we project and empirically test an important theoretical tension. On the one hand, the altruism effect predicts that beneficiaries colocated with a crisis will likely attract more donations. On the other hand, the bystander effect indicates that donors may perceive lower importance of their contribution as the responsibility of aiding the affected gets distributed. Thus, the effect of crisis colocation on the beneficiary’s project is equivocal, requiring empirical assessment. We address this tension empirically using the occurrence of a hurricane as the external crisis coupled with coarsened exact matching. Drawing on a donation platform dataset that facilitates schools in the US to seek funds, we find empirical support for the bystander effect. Additionally, we find that the baseline effect is contingent on the racial makeup of the beneficiary’s location and the extent to which a crisis occurs abruptly. Our study has implications for the theory and practice of managing online prosocial behavior.
... What emerges in this research is that even though a salient feature of crowdfunding compared to other funding methods is the "technical" removal of geographic limitations (the so-called "flat-world" proposition) [1], geography still plays a role in several aspects, such as in terms of likelihood of success, in terms of behaviors of funders (e.g., [2]), and in terms of projects' nature (e.g., [73]). Such research covers a broad range of crowdfunding models, from equity-based (e.g., [31,46]) to reward-based (e.g., [38,94]) and lending-based CF platforms (e.g., [67]), as well as different types of platforms' foci, from specialized platforms (e.g., [1,2] about music) to general purpose platforms (e.g., [67]) and different geographical contexts (e.g., [58] for China and [73] for the United States). The great majority of contributions show that funders favor geographically proximate projects, supporting a "home bias" proposition, while a few contributions disclose a positive effect of geographic distance (e.g., [59]). ...
... What emerges in this research is that even though a salient feature of crowdfunding compared to other funding methods is the "technical" removal of geographic limitations (the so-called "flat-world" proposition) [1], geography still plays a role in several aspects, such as in terms of likelihood of success, in terms of behaviors of funders (e.g., [2]), and in terms of projects' nature (e.g., [73]). Such research covers a broad range of crowdfunding models, from equity-based (e.g., [31,46]) to reward-based (e.g., [38,94]) and lending-based CF platforms (e.g., [67]), as well as different types of platforms' foci, from specialized platforms (e.g., [1,2] about music) to general purpose platforms (e.g., [67]) and different geographical contexts (e.g., [58] for China and [73] for the United States). The great majority of contributions show that funders favor geographically proximate projects, supporting a "home bias" proposition, while a few contributions disclose a positive effect of geographic distance (e.g., [59]). ...
... As a result, contributors in this model may be influenced by different factors that do not necessarily end in home bias, which is often the result of an attempt to reduce perceived economic risk. Another limitation of current CF literature is that existing studies have investigated home bias within individual countries or regions but have not examined it on an international scale [60,67,72,73]. Additionally, most studies have focused solely on the U.S. market, and the most frequently cited studies only include data from the early years of the industry, when CF was still highly fragmented and largely a niche market (see [2,3,23,67,72,73]). ...
... Signals Related to Project Typology: The geographical location of a project is considered a crucial factor in the success of crowdfunding campaigns (Agrawal et al., 2015;Lin and Viswanathan, 2016). Josefy et al. (2017) argue that location is particularly important for projects that resonate with local communities. ...
... The results presented in Table 4 confirm Hypothesis H1f, which asserts that geographical location has a positive effect on the success of a crowdfunding campaign. This finding indicates that geographical location plays a fundamental role in the decision-making process of potential contributors, a conclusion that is supported by the literature (Agrawal et al., 2015;Lin and Viswanathan, 2016;Josefy et al., 2017). ...
This study investigates how project-specific factors, the project creator, and campaign signals influence crowdfunding success in France. Analysing 424 projects from the KissKissBankBank platform, the research employs Generalised Linear Models to identify significant success factors. The findings reveal that signals such as publications, geographical location, project category, the creator’s past experience, the number of backers, and the funds raised positively affect campaign success. Contrary to our research hypotheses, signals related to factors such as video, the length of the project description, fundraising duration, and goal amount negatively impact success. Additionally, signals related to factors such as comments, readability of the project description, facial trust, and gender were found to be insignificant. This study provides valuable insights for young entrepreneurs, helping them identify crucial signals for crafting effective crowdfunding strategies, thereby enhancing the likelihood of their campaign success. It also serves as a resource for potential backers, enabling them to make informed investment choices before committing to crowdfunding projects.
... Local bias in investors' decisions is also found in lending-based crowdfunding (see, for instance, Jiang et al., 2020;Lin & Viswanathan, 2016). However, in this case, it does not seem to be driven by information asymmetries. ...
... Moreover, based on transaction data from the US platform Prosper.com, Lin & Viswanathan (2016) provide support to the emotional explanations of the local bias found in debt-based crowdfunding. They use a quasi-experimental approach and a natural experiment to control for the effect of unobservable quality-related information enveloped in the borrowers' location and document a strong local bias in both settings. ...
We investigate gender-specific local biases among investors in equity crowdfunding. Based on data from a major German crowdfunding platform, we find that domestic investors favour ventures that are geographically closer to their own place of residence. This bias is particularly evident among female investors, although it is partially offset by gender homophily, whereby female investors favour companies with women in the top management team. Finally, we show that the introduction of the German Small Investor Protection Act may have exacerbated local biases in the German crowdfunding market, particularly with respect to firms with female management. Overall, our results suggest that establishing their companies in close proximity to a large number of potential female crowd investors may help improve female entrepreneurs’ chances of attracting equity crowdfunding investment.
... Despite the promised benefits (OECD, 2020), P2P lending platforms face several challenges. Several studies find bias in lending (Burtch et al., 2014;Lin & Viswanathan, 2015) or unequal economic opportunities, which rejects a flat-world hypothesis (Singh et al., 2018). Similarly, over-indebtedness aggravates poverty and is a potential unintended consequence of a push to increase financial inclusion (Fanta & Makina, 2019). ...
... Recent evidence has highlighted that the failures of P2P lending platforms generate unequal opportunities and foster biases (Burtch et al., 2014;Lin & Viswanathan, 2015) (Singh et al., 2018). Our results theoretically support this evidence by showing that this effect can be enhanced even if the platforms survive an SME default shock. ...
Peer-to-peer (P2P) lending has attracted scholarly attention because of its economic significance and potential to democratize access to finance. However, P2P lending platforms face many challenges and failures that we need to understand more clearly. We build a computational model to study how borrower default affects P2P platform lending. We show that borrower default disrupts the P2P network formation process and undermines platform stability. Moreover, we find that defaults increase the inequality in accessing funding and provide a rationale for using cura-tion rules, widely used in P2P platforms, in contrast to P2P insurance, which fosters cascading defaults. We also address a new trend in P2P lending platforms in which large companies (institutional investors) play an increasingly important role. We find that the presence of large companies creates a denser network (more loans) but generates a trade-off between making the platform more resilient to cascading defaults and more dependent on specific players. Overall, we explain how borrower defaults affect platform stability and what makes a platform vulnerable, threatening its survival. We discuss research and managerial insights into platform stability and the economic effect of P2P lending platforms.
... Some of these scholars have examined how project owners' social networks (Agrawal et al., 2015;Moritz and Block, 2016) and geographical proximity (Saxton and Wang, 2014) are related to crowdfunding project success. Additionally, some researchers have investigated how project owners' backgrounds, project owners' emotional and cultural factors (Burtch et al., 2014;Lin and Viswanathan, 2016) and interactions between project owners and backers (Clauss et al., 2018;Efrat and Gilboa, 2020) are associated with crowdfunding project success. ...
... Some of these researchers have investigated backers' motivations for supporting crowdfunding projects (Baber and Fanea-Ivanovici, 2023;Bretschneider and Leimeister, 2017;B€ urger and Kleinert, 2021;Lin and Boh, 2020). Meanwhile, some scholars have studied backers' crowdfunding-related behaviors, such as herding behavior Kim et al., 2020;Saxton and Wang, 2014) and funding decisions (Gleasure and Feller, 2018;Kromidha and Robson, 2016;Lin and Viswanathan, 2016). Some scholars have also examined the association between project backers and crowdfunding project success by focusing on backers' affiliations (Herd et al., 2021), trust (Rodriguez-Ricardo et al., 2019;Shneor et al., 2022), interactions with project owners (Clauss et al., 2018;Efrat et al., 2021), influence (Tan and Reddy, 2021) and social networks (Chung et al., 2021). ...
Purpose
In this study, the authors sought to investigate how the implicit social ties of both project owners and potential backers are associated with crowdfunding project success.
Design/methodology/approach
Drawing on social ties theory and factors that affect crowdfunding success, in this research, the authors developed a model to study how project owners' and potential backers' implicit social ties are associated with crowdfunding projects' degrees of success. The proposed model was empirically tested with crowdfunding data collected from Kickstarter and social media data collected from Twitter. The authors performed the test using an ordinary least squares (OLS) regression model with fixed effects.
Findings
The authors found that project owners' implicit social ties (specifically, their social media activities, degree centrality and betweenness centrality) are significantly and positively associated with crowdfunding projects' degrees of success. Meanwhile, potential project backers' implicit social ties (their social media activities and degree centrality) are negatively associated with crowdfunding projects' degrees of success. The authors also found that project size moderates the effects of project owners' social media activities on projects' degrees of success.
Originality/value
This work contributes to the literature on crowdfunding by investigating how the implicit social ties of both potential backers and project owners on social media are associated with crowdfunding project success. This study extends the previous research on social ties' roles in explaining crowdfunding project success by including implicit social ties, while the literature explored only explicit social ties.
... Thirdly, our findings not only add to the existing evidence that geographical distance serves as a significant impediment to trade (Eaton and Kortum 2002;Disdier and Head 2008;Hillberry and Hummels 2008;Hortaçsu et al. 2009;Redding 2022), but also contribute to the body of research demonstrating the home bias in investment (Coval and Moskowitz 1999;Ke et al. 2010;Lin and Viswanathan 2016;Badarinza et al. 2022). Existing literature presents inconsistent conclusions regarding how environmental regulation affects firm location decisions and trade (Jeppesen et al. 2002). ...
This paper investigates whether stricter water pollution regulation induces capital flight toward relatively less-regulated regions in China. Exploiting a unique firm dataset, we construct an interregional investment network at the city pair level and examine the impact of a typical water pollution regulation as a natural experiment on interregional investment. We find that water pollution regulation does not significantly affect interregional investment flows. However, when considering geographical distance, there is substantial economic significance observed for close-range capital flight. These results suggest that the investment transfer of polluting industries is more likely to occur in local areas due to relatively small frictions in capital flow between geographically adjacent regions. Additionally, our findings indicate that strict water pollution regulation has a greater impact on private firms and foreign firms. Our study sheds light on a critical but always overlooked role of capital flow friction in pollution havens hypothesis and provides new evidence on the domestic pollution havens with geographical restrictions.
... These characteristics include funding goals, project presentation, geographic location, the size of one's social network, personality traits, and team dynamics. Many studies have examined these factors, including Lin et al. [63], Mukrimaa et al. [69], Mollick [66], Agrawal et al. [1], Ahlers et al. [2], Allison et al. [5], Colombo et al. [21], Lin and Viswanathan [62], Giudici, Guerini, and Rossi-Lamastra [35], Zheng et al. [97], Popescul et al. [76], Rakesh, Choo, and Reddy [78], and Kuppuswamy and Bayus [55]. Some researchers have investigated whether crowdfunding can provide greater access to finance for individuals who are often discriminated against by traditional financial institutions, such as women and racial minorities. ...
Crowdfunding has emerged as a transformative alternative to traditional innovation financing. Limitations of conventional funding sources have led to increased interest in alternative financing mechanisms. Crowdfunding, leveraging online platforms, has democratized access to capital, enabling entrepreneurs to develop products and services that align with broader population needs. This paper surveys the literature, demonstrating how crowdfunding platforms have opened doors to capital for entrepreneurs who might otherwise have found it challenging to secure funding through established channels. While crowdfunding's impact on innovation is multifaceted and contingent on factors like innovation type, entrepreneur quality, and regulatory frameworks, its growth trajectory remains robust, solidifying its significance as a source of entrepreneurial finance. The study aims to (1) analyze the effectiveness of crowdfunding in bridging the funding gap for startups, (2) compare crowdfunding with other forms of entrepreneurial finance, (3) assess crowdfunding’s role in fostering innovation, (4) differentiate between crowdfunding and crowdsourcing, and (5) identify the types of innovation facilitated by crowdfunding. Effective crowdfunding implementation hinges on these factors, necessitating concerted efforts from entrepreneurs, investors, and policymakers to surmount associated challenges and harness its potential for innovation and economic growth. The findings highlight the necessity for a supportive regulatory framework and the importance of transparency and trust in crowdfunding practices. This study underscores the role of policymakers in creating an environment that fosters innovation through alternative financing. However, this study is limited by the availability of comprehensive data across different crowdfunding platforms and regions. Further empirical research is needed to generalize the findings across various contexts, deepen our understanding of crowdfunding's impact on innovation, and develop strategies to leverage the potential of crowdfunding for innovation.
... Crowdfunding refers to the behavior of individuals or organizations that raise initial funds to realize their creative ideas [14], which includes elements of concepts such as microfinance [41] and crowdsourcing [44]. It is a mode to raise funds for a specific purpose for the public through the Internet [34,48]. Recently, an increasingly number of entrepreneurs and startups have chosen reward-based crowdfunding for their creative projects [31]. ...
While previous research has made considerable efforts to investigate the factors influencing fundraising outcomes, the predominant focus has been on project-related characteristics, with less attention given to how these factors vary in different levels of market competition. This study aims to explore how market competition level moderates the relationship between project-related characteristics and crowdfunding success. We utilized a dataset of 330,995 projects collected from Kickstarter and developed a logistic regression model by introducing the Herfindahl–Hirschman index to measure market competition level as a moderating variable. The findings reveal that factors such as funding goal, duration, and the number of backers have significant impacts on crowdfunding success, which are positively moderated by the market competition level. This study contributes to the existing literature on online crowdfunding by shedding light on the moderating role of market competition. It offers valuable insights for platform managers and project creators, enriching their understanding of how project characteristics interact with market competition to influence crowdfunding success.
... K. Agrawal et al., 2011). Contrasting this is other research showing that distance remains quite important in CF (Dejean, 2019;Lin & Viswanathan, 2016). Other research has focused on the proximity of fundraisers that pledge early. ...
How the COVID-19 pandemic has impacted entrepreneurship in America is a critical question. Despite the pandemic, entrepreneurs have been, and still are, looking to finance their ongoing, established businesses, as well as finance new ventures. Reward-based crowdfunding has filled an important gap in alternative finance since the 2008 financial crisis, and many are wondering if it can do the same for the current crisis. By examining 114,838 Kickstarter projects spanning more than a decade, including through the COVID-19 pandemic, this paper tries to answer the following questions: how has the COVID-19 pandemic impacted crowdfunding campaigns in America, and how have different product categories been affected? The analyses show that reward-based crowdfunding campaigns on Kickstarter have reached a global maximum in terms of success rates. Furthermore, the number of backers, the ratio of a campaign’s funds raised to its goal, and the average funds pledged per campaign, have also increased during the pandemic. Furthermore, some product categories have performed dramatically better than others. Each of these findings alone would contribute towards an increased understanding of the effects of the pandemic on crowdfunding; however, taken together, these results contribute substantially towards an understanding of the dynamics of crowdfunding with implications for academics as well as practitioners.
... A subset of the literature reveals the important factors that investors consider in their decision making (e.g., Gonzalez and Loureiro 2014, Tao et al. 2017, Wang et al. 2019. Studies also identify biases in microfinance investors' decisions, including preferences regarding gender (Chen et al. 2017) or location (Lin and Viswanathan 2016). Recent research pays attention to the value of machine-assisted tools in financial decision making. ...
Our study, conducted through a field experiment with a major Asian microloan company, examines the interaction between information complexity and machine explanations in human–machine collaboration. We find that human evaluators’ loan approval decision-making outcomes are significantly enhanced when they are equipped with both large information volumes and machine-generated explanations, underscoring the limitations of relying solely on human intuition or machine analysis. This blend fosters deep human engagement and rethinking, effectively reducing gender biases and increasing prediction accuracy by identifying overlooked data correlations. Our findings stress the crucial role of combining human discernment with artificial intelligence to improve decision-making efficiency and fairness. We offer specific training and system design strategies to bolster human–machine collaboration, advocating for a balanced integration of technological and human insights to navigate intricate decision-making scenarios efficiently. Specifically, the study suggests that, whereas machines manage borderline cases, humans can significantly contribute by reevaluating and correcting machine errors in random cases (i.e., those without explicitly congruent feature patterns) through stimulated active rethinking triggered by strategic information prompts. This approach not only amplifies the strengths of both humans and machines, but also ensures more accurate and fair decision-making processes.
... Some works investigated platform-related factors such as competition and platform types (Belavina et al., 2019;Coakley et al., 2021). From the creator's perspective, prior studies examined the impact of location, gender, race, and social capital (Bapna & Ganco, 2021;Chan et al., 2018;Duan et al., 2020;Kao et al., 2022;Lin & Viswanathan, 2015;Younkin & Kuppuswamy, 2018;Zheng et al., 2014). Researchers also studied the motivation behind backers' behavior (Cornelius & Gokpinar, 2020;Herd et al., 2021;G. ...
Purpose
This study aims to explore the structure and dynamics of Qatar’s crowdfunding ecosystem to support economic diversification and enhance entrepreneurial activities. This research focuses on analyzing the development of the industry, its regulatory environment and the collaborative dynamics among stakeholders.
Design/methodology/approach
This study used network analysis and Monte Carlo simulations to examine the interplay between various stakeholders, including entrepreneurs, to understand their roles and interconnections. This study also simulated different economic scenarios to evaluate the potential impact of crowdfunding under various market conditions and regulatory frameworks.
Findings
The analysis reveals a moderate level of crowdfunding activity characterized by conservative fundraising outcomes. The key factors identified include the pivotal role of a supportive regulatory framework and the necessity of robust stakeholder collaboration and infrastructure to ensure the industry’s resilience and growth.
Research limitations/implications
The findings are constrained by the simulated scenarios and the current state of the crowdfunding market in Qatar, suggesting that further research could explore emerging trends as the market evolves.
Practical implications
This study provides actionable recommendations for policymakers and regulatory authorities to boost a conducive environment for crowdfunding platforms. This includes enhancing connectivity among stakeholders and building robust infrastructure to support industry growth.
Social implications
This study underlines the significant social benefits of crowdfunding, including promoting innovation, supporting economic growth and facilitating entrepreneurship. These elements are vital to Qatar’s broader economic diversification strategy.
Originality/value
This study provides original insights into the crowdfunding landscape in Qatar, particularly in terms of strategic planning and risk management, using advanced simulation techniques to predict the outcomes of different regulatory and economic scenarios.
Crowdfunding (CF), an innovative entrepreneurial phenomenon, has gained considerable attention in social science outlets. Yet, the overall intellectual structure of this growing field of enquiry remains under wraps. This study addresses this knowledge gap by critically analysing 534 published articles using co-citation analysis of influential CF publications and tracing the intellectual history of the four variants of CF, namely rewards, donation, debt and equity. The co-citation analysis of highly cited publications uncovers the DNA (dynamics, nuances and anchors) of CF research revealing the field’s underlying disciplines and its theoretical anchors. Overall, the authors take cognisance of the intellectual scaffolding of CF research, map the advancement of CF variants and recognise its potential to act as a force of social and economic disruption. The critical analysis reported here reveals gaps in the extant literature which can provide novel avenues for productive enquiry by future CF scholars.
We identify the crucial role social networks play in crowdfunding markets. Investors are 50% more likely to fund projects that their peers support and are 11.2% more likely to fund projects from regions where they share strong social ties, given a one-standard-deviation change in the variables. More influential peers exert a greater influence, especially in the case of riskier projects, and the peer effects are amplified in crowdfunding platforms that prioritize transparency and accountability. Social ties transmit information about economic conditions in project locations, and they complement the influence of peer effects. Furthermore, the social network effects affect project funding outcomes and can be particularly valuable in mitigating the adverse effects of natural disasters. Our findings suggest that social networks play a significant role in crowdfunding markets by increasing investor awareness, disseminating information, and ultimately influencing capital allocations.
This paper was accepted by Kay Giesecke, finance.
Funding: L. Peng acknowledges the Keynes Fund, the Krell research grant, and the Wassermann research grant for financial support.
Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01364 .
This study explores the crucial yet underexamined labor supply side of the information technology (IT) job market, focusing on how IT professionals can strategically manage their knowledge diversity structures for career advancement. By introducing and operationalizing two novel metrics—knowledge omnificence and knowledge differentiation—the research examines their impact on IT workers’ salaries and job security. Through an extensive analysis of IT career data spanning from 2000 to 2016, the study reveals that moderate levels of knowledge omnificence and differentiation lead to the most favorable economic outcomes for IT professionals. Specifically, knowledge omnificence is associated with higher salary potential and career mobility, whereas knowledge differentiation is linked to enhanced job security. These findings provide actionable insights for IT workers aiming to optimize their career trajectories. Additionally, the study highlights the role of these knowledge structures in reducing gender disparities in the IT labor market, with women particularly benefiting from increased knowledge omnificence and differentiation. The research underscores the importance of strategic knowledge management for IT workers and offers valuable guidance for firms and policymakers to support a dynamic and equitable IT workforce.
This chapter discusses funding and financing issues of small and micro social enterprises (SEs) following a systematic approach. It conducts a systematic review of the SE financing literature and proposes a systematic model to examine the SE financing ecosystem. Specifically, the chapter discusses some traditional financing sources of SEs, including internal money, donations, government grants, and conventional debt and equity and examines SEs' advantage and challenges in securing financing using these traditional ways. To address the challenges of SE financing, this chapter proposes a systematic approach of solution and discusses some new and innovative sources of financing for SEs, such as the social impact bonds and the social venture capital. It then discusses crowdfunding and its best use for various types and stages of SEs. The chapter also suggests a list of future research ideas.
We compute the optimal signal mix for freelance workers vying for a job in a two-sided contract labor market platform.
Online labor platforms increasingly use monitoring systems to manage remote workers. This study assesses whether and how these systems mitigate employer bias in hiring foreign versus domestic workers. Leveraging the exogenous introduction of a monitoring system for time-based projects on a leading online labor platform, we employ a difference-in-differences model to estimate the impact of monitoring systems on mitigating employers’ tendency to bias against hiring foreign workers (home bias). Results indicate a significant reduction in home bias, along with a 15% increase in the hiring of foreign workers following the introduction of the monitoring system. The mitigation effect is notably stronger in high-routine projects or when employers lack prior positive experiences with foreign workers, two scenarios characterized by low external uncertainty and high internal uncertainty, respectively. Moreover, employers no longer exhibit a stronger home bias in scenarios of lower moral hazard risk or coordination costs. These findings lend support to the effectiveness of monitoring systems in mitigating employers’ home bias through facilitating contractual control and coordination. Our study offers important implications for the design of online labor platforms and policymaking.
This study aims to identify the antecedents and consequences of relationship motivation in the reward-based crowdfunding context. The findings from analyzing transaction data and survey responses from 302 contributors suggest the significant effects of the engagement and interactivity of a campaign on the formation of relationship motivation. This study also finds that relationship motivation is related to higher funding amounts and that the association is stronger during the campaign’s earlier stages. This study contributes to the literature by examining the drivers and roles of relationship motivation in a crowd-driven platform context. It also provides practical implications to guide the relationship-building strategies of creators.
Many charitable projects have started using online crowdfunding platforms to raise donations. The rise of these platforms as fundraising vehicles has been partially driven by easy access to a large pool of potential donors without the significant marketing costs that commonly accompany traditional fundraising. However, such a low cost of entry also results in a significant "crowding" of projects, making it difficult for donors to decide which projects to donate to. Thus, a charitable project encounters a fundamental marketing challenge of standing out from other projects when conventional techniques like advertising and promotion are limited. In this paper, we posit that a project can credibly signal its quality via a strategy of "self-donation," whereby the project steward donates to her own project.
Our empirical setting is an online education crowdfunding platform. By examining millions of donations, we find that self-donations improve the donation pace, contributed amount, and funding success. We show that the self-donation strategy works only when a self-donation is visible to potential donors and is especially effective at the early stage of the funding cycle or when project stewards are inexperienced, where the projects face significant uncertainty. We find evidence for self-donation as a quality signal through various observable proxies like impact letters to donors and corporate matching. Overall, our findings are consistent with a signaling mechanism that allows the separation of high-quality projects from lower-quality ones.
This study examines gender and ethnic differences among early-stage rewards-based crowdfunding entrepreneurs based in the US. In particular, we focus on ethnic women entrepreneurs and examine differences in the value of different types of signals relative to other US-based entrepreneurs seeking to start a business on Kickstarter. Addressing the self-selection of ethnic entrepreneurs, we found that ethnic women entrepreneurs are associated with lower crowds of local backers relative to other types of entrepreneurs. We also found differences in the value of different types of signals depending on the type of entrepreneur. For ethnic women entrepreneurs, who appear to be the less legitimate entrepreneurs with local supporters, the value of internal signals such as self-reported education and commitment is limited compared to non-ethnic entrepreneurs. In contrast, external signals such as the selection of platform staff play a positive and more important role. Academic, practical and policy implications are discussed in the light of signaling, gender and ethnic entrepreneurship theories.
Fundraisers on reward-based crowdfunding platforms have increasingly sought to base their promotional strategy on the principle of scarcity. Although previous studies find that using a limited-edition inventory contributes to the success of campaigns, it remains unknown how fundraisers should leverage a scarcity strategy in the upfront design of reward options. Using a unique dynamic panel dataset from a leading reward-based crowdfunding platform, we develop a hierarchical Bayesian model to capture the dynamic arrival process of backers at the reward option level. We find that backers are driven by excess demand rather than limited supply. Putting quantity restrictions on a reward option can discourage demand if it fails to accumulate an adequate number of backers first. In addition, the scarcity strategy is more effective in high-priced reward options than in low-priced reward options. This study offers practical implications for the implementation of a scarcity strategy for both platform managers and fundraisers.
Purpose
Information opacity in donation crowdfunding activities has constrained the healthy development of China’s public welfare activities. Addressing the trust crisis and enhancing public engagement warrants further investigation. This study aims to uncover the moderating effect of activity transparency by utilizing data from 1,029 donation crowdfunding projects on the Sina Weibo Public Welfare Social Platform. In this way, we seek to elucidate the impact of donation crowdfunding events on fundraising ability.
Design/methodology/approach
This study selects text complexity, number of supporters, creator experience, and social capital as explanatory variables; innovatively selects the number of updates of online crowdfunding activities and total reading volume as moderating variables; selects the number of shares of crowdfunding activities as a mediating variable; and constructs a moderated mediation multiple regression model for fundraising ability.
Findings
Our findings indicate that independent variables, such as text complexity, number of supporters, and social capital, can significantly affect the dependent variable, fundraising ability. However, creator experience does not influence fundraising ability. Furthermore, social interaction has a mediating effect, whereas activity transparency has a reverse moderating effect. These results indicate that social interaction can enhance the fundraising ability of donation crowdfunding events. However, with an increase in information transparency, the fundraising ability of social media decreases.
Originality/value
The originality of this research is in clarifying the internal factors affecting fundraising ability through induction, making bold assumptions, and focusing on how social media’s effective interaction and activity transparency will affect public welfare crowdfunding fundraising ability.
This study analyses the relationship between geographic space, social networks, and financial knowledge in interregional equity crowdfunding flows based on the concept of financial ecology. Using data from a leading Dutch equity crowdfunding platform, we find that interregional crowdfunding investment decreases with geographic distance. Furthermore, the negative effect of distance is weaker if interregional social networks are strong and if the investor region has a high concentration of the financial industry. The results extend the conceptual foundation of financial ecology by explaining how individual behaviors affect the macro-level output of a financial ecology.
Medical crowdfunding is a popular channel for people seeking financial assistance to cover their medical expenses, allowing them to collect donations from large numbers of donors. However, a mismatch between the supply and demand of donations creates large heterogeneity in the fundraising outcomes across medical crowdfunding campaigns and such uncertainty can impede the timely planning of treatment for patients. Providing early and accurate forecasts for medical crowdfunding performance can better inform fundraisers and assist them in optimizing timely interventions to improve fundraising outcomes. In this study, we propose a new approach that effectively combines time-varying features and time-invariant features in a deep learning model, to provide dynamic predictions of fundraising outcomes. When compared with a comprehensive set of baseline models, our model consistently demonstrates higher predictive accuracy while requiring a shorter observation window of data, thus achieving both accurate and early prediction objectives. We further conduct a temporal clustering analysis to analyze the heterogeneous patterns in how the time-varying features relate to fundraising outcomes. In addition, we perform simulation analyses to demonstrate that interventions from fundraisers can significantly improve the fundraising performance of disadvantaged cases that are predicted to receive the lowest donation amounts, particularly when the interventions are implemented early. These findings show that our deep learning prediction model and the actionable insights can provide timely feedback to fundraisers and promote equal access to resources for all. Our proposed approach is applicable to various contexts, enabling effective processing of diverse sources of data and facilitating early interventions.
This study explores the decision-making process in online peer-to-peer (P2P) lending, a rapidly growing source of fixed income for investors. We examine how lenders’ bidding amounts are influenced by interest rates and psychological distance, which is determined by the borrower’s demographic attributes. Our findings, based on data from a popular Chinese P2P lending platform, reveal that geographic distance decreases bidding amounts, indicating a home bias effect. Conversely, social distance increases bidding amounts, suggesting a social distance effect. Interestingly, both types of psychological distance amplify the positive impact of interest rates on bidding amounts. Four controlled experiments further validate these relationships. This research not only contributes to the theoretical understanding of P2P lending but also offers practical insights for policymaking in the high-risk financial context.
Problem definition: Crowdfunding goes beyond raising funds. Entrepreneurs often use crowdfunding to solicit feedback from customers to improve their products and may therefore prefer to launch their crowdfunding campaigns using basic versions of their products with fewer features. However, customers may not be persuaded by a campaign if the product appears to be underdeveloped. In view of this tradeoff, a key question for entrepreneurs is how much to develop a product before launching a crowdfunding campaign. Methodology/results: Analyzing a game-theoretical model and testing its predictions empirically, we study (1) how the development level of a product at campaign launch, measured by the initial number of product features, influences whether customers will make comments that help entrepreneurs improve the product; (2) whether entrepreneurs continue to improve the product during the campaign; and (3) whether the campaign is successful. We show that, as the number of product features at campaign launch increases, the likelihood that customers will make comments and that the product will be improved during the campaign first increases but then decreases. Furthermore, the likelihood of campaign success first increases but then decreases with the number of product features at campaign launch. Finally, by analyzing the interactions between customer feedback, product improvement, and campaign success, we show that customer feedback motivates entrepreneurs to improve the product during the campaign. Moreover, entrepreneurs should take account of the initial number of features and customer feedback when improving the product, because otherwise product improvements can harm campaign success. Managerial implications: Our study provides practical insights on how entrepreneurs can use crowdfunding to aid product development and improvement. Specifically, entrepreneurs should avoid overdeveloping their products before crowdfunding campaigns because, as well as decreasing the chance of campaign success, this could hinder their ability to save development costs (e.g., market research costs) through involving customers in product development.
Supplemental Material: The online appendices are available at https://doi.org/10.1287/msom.2022.0344 .
A solid amount of research on crowdfunding per se is available; however, cross-border issues remain largely neglected. Although crowdfunding campaigns are theoretically easy to establish over the Internet, projects with their origin in small countries such as Liechtenstein constantly face the limitation of potential financing within a country with only a few people and therefore have only minor investment potential. We use a systematic literature review to analyze and build on well-known success factors, to identify three key factors to consider when targeting cross-border investors—behavioral biases, multiple taxation system, and multiple legislation—which are approached in a multidisciplinary discussion.
We propose a generalized revealed preference approach to infer how agents use past data to adapt in a changing environment.
Online platforms have emerged as a dominant business model in numerous industries in the new millennium. In light of the substantial and burgeoning body of empirical platform research, this article synthesizes extant studies and identifies the evolution of underlying research methodologies and topics. Building upon a database of 860 empirical online platform papers in premier journals during the first two decades of the new millennium, this article presents a categorization framework based on the online platform type (including search platforms, e‐commerce platforms, online communities, and mobile platforms) and research perspective (including platform participants, platform orchestrators, and platform ecosystems). We provide a critical review of noteworthy trends and highlight directions for future research in each category of the proposed framework. A comprehensive bibliometric analysis is then conducted to visualize and track scholarship in empirical online platform research. Lastly, we adopt an interdisciplinary lens to synthesize our critical review of empirical online platform research into lessons and research opportunities that emerge from multiple disciplines.
Crowdfunding, or soliciting small contributions from large and dispersed crowds through online platforms, is an increasingly indispensable strategy for established firms, young ventures, and aspiring entrepreneurs alike. Synthesizing research in the fields of management, entrepreneurship, innovation, operations, information systems, and marketing, we conduct an integrative review of the crowdfunding research accumulated over the past decade. We aim to break down disciplinary silos to develop a framework that integrates insights across research communities. We identify three underlying dimensions that differentiate extant research: the goal of the campaigner, the role of the crowd, and the boundary of the crowdfunding event. Scholars have brought two perspectives to bear on these questions: an elemental perspective and a processual perspective. We outline an integrative model that takes account of crowdfunding as a process involving heterogeneous participants with idiosyncratic monetary and non-monetary goals at different stages. Our multidisciplinary review of this expanding body of literature not only integrates dispersed insights but also, more importantly, stimulates a future research agenda that goes beyond the traditional boundaries of crowdfunding research.
We study rare events data, binary dependent variables with dozens to thousands of times fewer ones (events, such as wars, vetoes, cases of political activism, or epidemiological infections) than zeros ("nonevents"). In many literatures, these variables have proven difficult to explain and predict, a problem that seems to have at least two sources. First, popular statistical procedures, such as logistic regression, can shar ply underestimate the probability of rare events. We recommend corrections that outperform existing methods and change the estimates of absolute and relative risks by as much as some estimated effects repor ted in the literature. Second, commonly used data collection strategies are grossly inefficient for rare events data. The fear of collecting data with too few events has led to data collections with huge numbers of obser vations but relatively few, and poorly measured, explanator y variables, such as in international conflict data with more than a quarter-million dyads, only a few of which are at war. As it turns out, more efficient sampling designs exist for making valid inferences, such as sampling all available events (e.g., wars) and a tiny fraction of nonevents (peace). This enables scholars to save as much as 99% of their (nonfixed) data collection costs or to collect much more meaningful explanator y variables. We provide methods that link these two results, enabling both types of corrections to work simultaneously, and software that implements the methods developed.
The central claim in this paper is that by explicitly introducing costs of international trade (narrowly, transport costs but more broadly, tariffs, nontariff barriers and other trade costs), one can go far toward explaining a great number of the main empirical puzzles that international macroeconomists have struggled with over twenty-five years. Our approach elucidates J. McCallum's home bias in trade puzzle, the Feldstein-Horioka saving-investment puzzle, the French-Poterba equity home bias puzzle, and the Backus-Kehoe-Kydland consumption correlations puzzle. That one simple alteration to an otherwise canonical international macroeconomic model can help substantially to explain such a broad arrange of empirical puzzles, including some that previously seemed intractable, suggests a rich area for future research. We also address a variety of international pricing puzzles, including the purchasing power parity puzzle emphasized by Rogoff, and what we term "the exchange rate disconnect puzzle." The latter category of riddles includes both the Meese-Rogoff exchange rate forecasting puzzle and the Baxter-Stockman neutrality of exchange rate regime puzzle. Here, although many elements need to be added to our extremely simple model, trade costs still play an essential role.
Crowdfunding allows founders of for-profit, artistic, and cultural ventures to fund their efforts by drawing on relatively small contributions from a relatively large number of individuals using the internet, without standard financial intermediaries. Drawing on a dataset of over 48,500 projects with combined funding over $237 M, this paper offers a description of the underlying dynamics of success and failure among crowdfunded ventures. It suggests that personal networks and underlying project quality are associated with the success of crowdfunding efforts, and that geography is related to both the type of projects proposed and successful fundraising. Finally, I find that the vast majority of founders seem to fulfill their obligations to funders, but that over 75% deliver products later than expected, with the degree of delay predicted by the level and amount of funding a project receives. These results offer insight into the emerging phenomenon of crowdfunding, and also shed light more generally on the ways that the actions of founders may affect their ability to receive entrepreneurial financing.
How did the diffusion of the internet affect regional wage inequality? We examine the relationship between business investment in advanced internet technology and local variation in US wage growth between 1995 and 2000. We identify a puzzle. The internet is widespread, but the economic payoffs are not. Advanced internet technology is only associated with substantial wage growth in the 6 percent of counties that were already highly wealthy, educated, and populated and had IT-intensive industry. Advanced internet and wage growth appear unrelated elsewhere. Overall, advanced internet explains over half the difference in wage growth between already well-off counties and all others. (JEL J31, L86, O33, R11, R23)
Despite the gravity equations' empirical successes in "explaining" trade flows, the model's predictive potential has been inhibited by an absence of strong theoretical foundations. A general equilibrium world trade model is presented from which a gravity equation is derived by making certain assumptions, including perfect international product substitutability. If, however, trade flows are differentiated by origin as evidence suggests, the typical gravity equation is misspecified, omitting certain price variables. The last section presents empirical evidence supporting the notion that the gravity equation is a reduced form from a partial equilibrium subsystem of a general equilibrium model with nationally differentiated products.
We analyze geographic patterns of trade between individuals using transactions data from eBay and MercadoLibre, two large online auction sites. We find that distance continues to be an important deterrent to trade between geographically separated buyers and sellers, though to a lesser extent than has been observed in studies of non-Internet commerce between business counterparties. We also find a strong "home bias" for trading with counterparties located in the same city. Further analyses suggest that location-specific goods such as opera tickets, cultural factors, and the possibility of direct contract enforcement in case of breach may be the main reasons behind the same-city bias. (JEL D44, F11, R12)
This paper exploits the division of Germany after the Second World War and the reunification of East and West Germany in 1990 as a natural experiment to provide evidence for the importance of market access for economic development. In line with a standard new economic geography model, we find that, following division, cities in West Germany close to the East-West German border experienced a substantial decline in population growth relative to other West German cities. We show that the model can account for the quantitative magnitude of our findings and provide additional evidence against alternative possible explanations. (JEL F15, N94, R12, R23)
Wolf (2000) demonstrates that trade within the U.S. appears substantially impeded by state borders. We revisit this finding with improved data. We show that much intra-national home bias can be explained by wholesaling activity. Shipments by wholesalers are much more localized within states than shipments from manufacturing establishments. Controlling for relative prices and the use of actual, rather than imputed, shipment distances also reduces home bias estimates.
One aspect of crowdfunding that has garnered large interest of late is the ability of crowdfunding to ‘democratize’ access to capital. Entrepreneurs initiating crowdfunded projects, located anywhere, are able to access sources of capital from anywhere. As such, entrepreneurs who face less attractive credit environments may on the margin choose to engage in crowdfunding. Similarly, projects in geographically less populated areas may benefit from crowdfunding. In this paper, we examine how geography affects the formation of crowdfunded projects. We collected data on housing prices and local credit markets that are known to determine the cost of accessing traditional sources of credit and matched these data to a novel data set from a leading crowdfunding market. We find that small cities appear to get a disproportionate benefit from crowdfunding. Our findings also show that difficult access to credit from local banks induces entrepreneurs to rely more on crowdfunding. Moreover, tighter credit constraints due to a drop in housing prices have a stronger effect on entrepreneurs who initiate large projects and live in high income areas. The impact of a local credit market structure is almost entirely via ‘location-independent’ projects that attract less funding from local people. Overall, we provide evidence that web-enabled crowdfunding has the potential to democratize access to capital in that it can be a viable option for entrepreneurs having difficulty accessing traditional offline channels of credit.
A striking feature of international portfolio investment is the extent to which equity portfolios are concentrated in the domestic market of the investor. We investigate differences in home bias on an individual level by studying portfolios formed as a part of the new defined contribution pension plan in Sweden. We estimate the likelihood of home bias and use individuals’ demographic and socioeconomic features as explanatory variables. Our findings indicate that the likelihood of home bias is caused by both rational and irrational factors. Moreover, we relate home bias to investors’ desire to hedge against inflation, sophistication and overconfidence.
This paper examines the role of reputable investors in a crowdfunding market. Using a novel data set on individual investments in a crowdfunding market for mobile applications, we investigate whether early investments serve as signals of quality for later investors, and if the value of these signals differs depending on the identity of early investors. We find that reputable investors — app developer investors and experienced investors — tend to invest early. We also find that while both types of experts are likely to influence later investors, the specifics of their expertise determine their influence. App developer investors tend to have a better knowledge of the product and are found to be more influential for “concept apps” (apps in the pre-release stage), whereas experienced investors — investors with a better knowledge of market performance are found to be more influential for “live apps” (apps that are already being sold in the market). Our findings show that the majority of investors in this market — the crowd — although inexperienced, are rather sophisticated in their ability to identify and exploit nuanced differences between various signals within the same market. In examining the ex-post performance of apps, we find that successful funding in the market is positively associated with ex-post app sales, providing some indication of rational herding among investors. Our study offers new insights for theories of opinion leadership and signaling, and also has practical implications for the design of crowdfunding markets.
As recently as 20 years ago the USA began a transition from a declining industrial and manufacturing economy to an emerging entrepreneurial/innovation-driven economy. With this transition, the early-stage equity market has also evolved. As the institutional venture capital industry continues to focus on later stage and larger investments, the private investor market now provides the major source of seed and start-up capital. However, imperfections in the seed and start-up market have led to market inefficiencies for the high-growth firm. Two funding gaps appear to exist in the US equity market, both largely as a result of these market inefficiencies. This paper provides a broad overview of the early-stage equity market for high-growth ventures in the USA. In light of the critical role of business angels in the early-stage market, special attention will be given to this population. Also included is a discussion of angel markets and recent trends in the early-stage equity financing of entrepreneurial ventures.
In this paper, we examine the ecological consequences of initial public offerings (IPOs) and acquisitions, specifically how the spatial distribution of these events influences the location-specific founding rates of new companies. We explore whether relatively small spatial units (metropolitan statistical areas) in close geographic proximity to firms that recently have been acquired or experienced an IPO exhibit high new venture creation rates and whether the magnitudes of these effects depend on regional differences in statutes governing the freedom of employees to move between employers. Count models of biotechnology firm foundings establish three findings: (1) IPOs of organizations located contiguous to or within an MSA accelerate the founding rate within that MSA, (2) acquisitions of biotech firms situated near to or within an MSA accelerate the founding rate within the MSA, but only when the acquirer enters from outside of the biotech industry, and (3) the enforceability of post-employment non-compete covenants, which is determined at the state level, strongly moderates these effects.
Similarity breeds connection. This principle - the homophily principle - structures network ties of every type, including marriage, friendship, work, advice, support, information transfer, exchange, comembership, and other types of relationship. The result is that people's personal networks are homogeneous with regard to many sociodemographic, behavioral, and intrapersonal characteristics. Homophily limits people's social worlds in a way that has powerful implications for the information they receive, the attitudes they form, and the interactions they experience. Homophily in race and ethnicity creates the strongest divides in our personal environments, with age, religion, education, occupation, and gender following in roughly that order. Geographic propinquity, families, organizations, and isomorphic positions in social systems all create contexts in which homophilous relations form. Ties between nonsimilar individuals also dissolve at a higher rate, which sets the stage for the formation of niches (localized positions) within social space. We argue for more research on: (a) the basic ecological processes that link organizations, associations, cultural communities, social movements, and many other social forms; (b) the impact of multiplex ties on the patterns of homophily; and (c) the dynamics of network change over time through which networks and other social entities co-evolve.
This paper documents that investors are more likely to hold, buy, and sell the stocks of Finnish firms that are located close to the investor, that communicate in the investor's native tongue, and that have chief executives of the same cultural background. The influence of distance, language, and culture is less prominent among the most investment-savvy institutions than among both households and less savvy institutions. Regression analysis indicates that the marginal effect of distance is less for firms that are more nationally known, for distances that exceed 100 kilometers, and for investors with more diversified portfolios.
Most credit assessment models used in practice are based on simple credit scoring functions estimated by discriminant analysis. These functions are designed to distinguish whether or not applicants belong to the population of ‘would be’ defaulters. We suggest that the traditional view that emphasizes default probability is too narrow. Our model of credit assessment focuses on expected earnings. We demonstrate how maximum likelihood estimates of default probabilities can be obtained from a bivariate ‘censored probit’ framework using a ‘choice-based’ sample originally intended for discriminant analysis. The paper concludes with recommendations for combining these default probability estimates with other parameters of the loan earnings process to obtain a more meaningful model of credit assessment.
We test extant hypotheses of the home bias in equity holdings using high quality cross-border holdings data and quantitative measures of barriers to international investment. The effects of direct barriers to international investment, when statistically significant, are not economically meaningful. More important are information asymmetries that owe to the poor quality and low credibility of financial information in many countries. While a direct measure of information costs is not available, some foreign firms have reduced these costs by publicly listing their securities in the United States, where investor protection regulations elicit standardized, credible financial information. A proxy for the reduction in information asymmetries—the portion of a country’s market that has a public US listing—is a major determinant of a country’s weight in US investors’ portfolios. Foreign countries whose firms do not alleviate information costs by opting into the US regulatory environment are more severely underweighted in US equity portfolios.
We find that local analyst recommendations are systematically more optimistic than foreign analyst recommendations in emerging markets. The effects of this novel among local analysts overwhelm any information asymmetry between foreign and local analysts. Consequently, local analyst upgrades underperform foreign analyst upgrades, while local analyst downgrades outperform foreign analyst downgrades. Neither foreign investors, local institutions, nor retail investors appear to be fully cognizant of this bias. Trade reactions suggest that foreign investors overestimate the bias in foreign analyst recommendations while local institutions underestimate the bias in local analyst recommendations. These results are pervasive across countries, time periods, and stock groupings, and can be traced to investment banking pressure.
The authors show that discrimination can occur even when it is common knowledge that underlying group characteristics do not differ and employers do not prefer same-group candidates. When employers can judge job applicants' unknown qualities better when candidates belong to the same group and hire the best prospect from a large pool of applicants, the top applicant is likely to have the same background as the employer. The model has policy, empirical, and experimental implications. The model predicts that 'screening discrimination' is more likely to occur and persist in sectors in which underlying quality is important but difficult to observe. Copyright 1996 by University of Chicago Press.
A number of recent studies have found intranational trade to be excessive compared to international trade, based on a gravity specification. The preferred explanation for this finding has been the presence of formal and informal trade barriers, with associated welfare consequences. If such barriers were indeed the sole culprit, home bias should not exist on the subnational level. We find, however, that home bias is present within U.S. states, suggesting the presence of other causes of excessive home trade. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog
This paper empirically investigates high-yield bond default and call behavior using a competing risks hazard model that simultaneously estimates the impact of bond age, issue-specific characteristics and business conditions on both events. Results reveal nonmonotonic aging effects: default rates increase and then drop while call rates first increase and then level off. Rating and coupon size affect default risk, while maturity and issue size impact only call rates. Defaults are more likely when economic conditions have worsened and no improvement is anticipated. Calls are more likely when interest rates have decreased but are expected to rise. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog
We test whether the home bias in equity portfolios is caused by investors trying to hedge inflation risk. The empirical evidence
is consistent with this motive only if investors have very high levels of risk tolerance and equity returns are negatively
correlated with domestic inflation. We then develop a model of international portfolio choice and equity market equilibrium
that integrates inflation risk and deadweight costs. Using this model we estimate the levels of costs required to generate
the observed home bias in portfolios consistent with different levels of risk aversion. For a level of risk aversion consistent
with standard estimates of the domestic equity market risk premium, these costs are about a few percent per annum, greater
than observable costs such as withholding taxes. Thus, the home bias cannot be explained by either inflation hedging or direct
observable costs of international investment unless investors have very low levels of risk aversion.
We examine the accuracy and contribution of the Merton distance to default (DD) model, which is based on Merton's (1974) bond
pricing model. We compare the model to a “naïve” alternative, which uses the functional form suggested by the Merton model
but does not solve the model for an implied probability of default. We find that the naïve predictor performs slightly better
in hazard models and in out-of-sample forecasts than both the Merton DD model and a reduced-form model that uses the same
inputs. Several other forecasting variables are also important predictors, and fitted values from an expanded hazard model
outperform Merton DD default probabilities out of sample. Implied default probabilities from credit default swaps and corporate
bond yield spreads are only weakly correlated with Merton DD probabilities after adjusting for agency ratings and bond characteristics.
We conclude that while the Merton DD model does not produce a sufficient statistic for the probability of default, its functional
form is useful for forecasting defaults.
This article uses a new dataset of credit card accounts to analyze credit card delinquency, personal bankruptcy, and the stability of credit risk models. We estimate duration models for default and assess the relative importance of different variables in predicting default. We investigate how the propensity to default has changed over time, disentangling the two leading explanations for the recent increase in default rates--a deterioration in the risk composition of borrowers versus an increase in borrowers' willingness to default due to declines in default costs. Even after controlling for risk composition and economic fundamentals, the propensity to default significantly increased between 1995 and 1997. Standard default models missed an important time-varying default factor, consistent with a decline in default costs. Copyright 2002, Oxford University Press.
The strong bias in favor of domestic securities is a well-documented characteristic of international investment portfolios, yet we show that the preference for investing close to home also applies to portfolios of domestic stocks. Specifically, U.S. investment managers exhibit a strong preference for locally headquartered firms, particularly small, highly levered firms that produce nontraded goods. These results suggest that asymmetric information between local and nonlocal investors may drive the preference for geographically proximate investments, and the relation between investment proximity and firm size and leverage may shed light on several well-documented asset pricing anomalies. Copyright The American Finance Association 1999.
Based on the empirical firm growth literature and on heterogeneous (microeconomic) adjustment models, this paper empirically investigates the impact of European industry fluctuations and domestic business cycles on the growth performance of European firms. Since the implementation of the Single Market program the EU 27 member countries share a common market. Accordingly, the European industry business cycle is expected to become a more influential predictor of European firms' behaviour at the expense of domestic fluctuations. Empirically, the results of a two-part model for a sample of European manufacturing firms reject this hypothesis. Additionally, subsidiaries of multinational enterprises constitute the most stable firm cohort throughout the observed business cycle.
Investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest, a phenomenon called "equity home bias." In the absence of this bias, investors would optimally diversify domestic output risk using foreign equities. Therefore, consumption growth rates would tend to co-move across countries even when output growth rates do not. Empirically, however, consumption growth rates tend to have a lower correlation across countries than do output growth rates, a phenomenon I call "consumption home bias." In this paper, I discuss these two biases and their potential relationship as suggested by the literature.
The geography of crowdfunding
- A K Agrawal
- C Catalini
- A Goldfarb
Theories of statistical discrimination and affirmative action: A survey. NBER Working Paper 15860
- H Fang
- A Moro