Rethinking investors' herding behavior under the conditions of reward-based crowdfunding platform
| DOI | https://doi.org/10.1108/IMDS-06-2022-0383 |
| Published date | 04 October 2022 |
| Date | 04 October 2022 |
| Pages | 2762-2782 |
| Subject Matter | Information & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems |
| Author | Zujun Zhu,Junzhe Liu,Mengru Zhang |
Rethinking investors’herding
behavior under the conditions
of reward-based
crowdfunding platform
Zujun Zhu
School of Management, University of Science and Technology of China, Hefei, China
Junzhe Liu
University of Nottingham - Ningbo China, Ningbo, China, and
Mengru Zhang
University of Science and Technology of China, Hefei, China
Abstract
Purpose –Reward-based crowdfunding, an emerging financing channel for SMEs, has attracted significant
attention from scholars and practitioners. Scholars have mostly explored investors’herding behavior in
platforms to better understand investors’decision-making mechanisms and management of funding projects.
However, current evidence is inconsistent regarding herding behavior during the funding process. This study
proposes prior funding performances have a nonlinear effect on subsequent funding performance and that this
nonlinear relationship is conditional on competition intensity and information disclosure.
Design/methodology/approach –Based on objective data collected from a dominant reward-based
crowdfunding platform in China, this study follows a panel ordinary least squares (OLS) model to estimate the
effects of prior funding performance on the subsequent funding performance and the moderating role of
environmental factors (i.e. competition intensity and information disclosure) in a given platform.
Findings –The results show prior funding performance had an inverted U-shaped effect on subsequent
performance; this inverted U-shaped relationship was attenuated when the number of interactive messages
was larger and competition was more intense, and it was strengthened when information updates were more
frequent.
Originality/value –The effects of prior funding performance on subsequent performance at different stages
of the fundraising process and under different platform environments remains unclear. The authors revisit the
varying viewpoints in existing research and propose that the enhancement and substitution effects of prior
funding performance are dominant at different funding stages. Overall, the results of this study highlight that
the crowdfunding platform environment may become a boundary condition for investors’herding behavior.
Keywords Crowdfunding, Herding effect, Competition intensity, Information disclosure
Paper type Research paper
1. Introduction
Given its growing market share, reward-based crowdfunding (RBCF) has emerged as a new
financing channel for SMEs and has received widespread attention from researchers and
practitioners (Chan et al., 2020). Yet, despite the crowdfunding industry’s rapid market
growth, performance varies significantly among projects on the same platform. Tian et al.
(2021), for instance, found the average funding percentage of successful projects was 262%
and less than 10% for failed projects. Scholars have posited that the herding effect may be the
main driver of extreme phenomena in the “All or Nothing”model of crowdfunding platforms
with information asymmetry (Tian et al., 2021; Wang et al., 2021). The herding effect, defined
as the propensity to adopt the viewpoint and actions of the majority at the expense of one’s
IMDS
122,12
2762
Funding: This work was supported by the National Key R&D Program of China (2020AAA0103804).
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/0263-5577.htm
Received 20 June 2022
Revised 24 August 2022
Accepted 11 September 2022
Industrial Management & Data
Systems
Vol. 122 No. 12, 2022
pp. 2762-2782
© Emerald Publishing Limited
0263-5577
DOI 10.1108/IMDS-06-2022-0383
own viewpoint, is common in many markets (Bindra et al., 2022). Studies in information
systems, finance, and online marketing have similarly shown consumers engage in herding
under uncertain conditions (Ding and Li, 2019). As investors in RBCF platforms have limited
private product information, their observations of other investors’actions (i.e. prior funding
performance) has become an important factor in making investment decisions (Burtch et al.,
2013). Ding and Li (2019) have indicated managers may “strategically manage cues to
generate a desirable herding effect among consumers to improve purchases and create
value”. Compared to both online platforms and traditional markets, RBCF platforms have
two unique features: (1) project creators must complete pre-set funding goals within a
specified timeframe to obtain funding and, (2) in addition to obtaining project rewards,
investors are also prosocially motivated to help creators complete their ventures (Dai and
Zhang, 2019). Together, these features present new theoretical and practical perspectives for
researchers and managers looking to understand herding behaviors among investors.
Although research has revealed that prior fundraising levels appear to be a decent
predictor of crowdfunding performance, many studies have documented inconsistent
conclusions (Chan et al., 2020). Scholars have specifically presented two competing
hypotheses on the herding effect in crowdfunding platforms (Petit and Wirtz, 2022): the
enhancement model and the substitution model (Burtch et al., 2013). The enhancement model
argues that quality signals of quality are implicitly provided by previous investors’behavior
and that they can enhance subsequent crowdfunding performance (Tian et al., 2021). The
substitution model argues the existence of a negative relationship between prior and
subsequent crowdfunding performance (Burtch et al., 2013). In other words, investors’
motivation will decrease when they believe their contributions are no longer essential for
projects with high funding performance (Kuppuswamy and Bayus, 2017). A single linear
relationship framework may not be capable of delineating a complete profile of the herding
effect because it assumes investors will always imitate the actions of preceding investors at
different fundraising stages and may ignore the unique characteristics of crowdfunding.
Investors may process information reflected by prior funding performances differently at
different stages of the crowdfunding process and as a result may further incorporate other
platform-based informational factors. Chan et al. (2020) has also highlighted a similar reason
that “illustrate the nonlinear nature of this relationship at the collective level.”We propose
that the enhancement model will dominate at low levels of prior funding as it represents a
valuable quality signal (Song et al., 2019). At high levels, however, we propose the
substitution model will dominate because investors will perceive less of an effect in
supporting outperformed projects (Kuppuswamy and Bayus, 2017). The current study works
to do so by answering the following research question: (1) Is there an inverted U-shaped
relationship between prior funding performance and subsequent performance?
In regard to crowdfunding projects, investors’herding behavior is likely conditional on a
platform’s informational context. The herding effect is marked by two preconditions:
sequential action and uncertainty conditions (Ding and Li, 2019). Informational factors in
platform environments affect investors’perceived uncertainty, which can change the
mechanism of their herding behavior. The previously mentioned inconsistent findings may
stem from studies that have overlooked the presence and role of uncertain conditions in
investors’decision-making. For example, Tian et al. (2021) has called for current rational
herding behavior research on crowdfunding to incorporate private information as a
moderating mechanism in the fundraising process. At the platform ecosystem level,
investors’decision outcomes depend critically on how the platform environment is shaped by
other participants’behavior, such as competition intensity (Kretschmer et al., 2020;Zhou et al.,
2014). Competitors of the focal project convey rich information containing quality signals to
pursue limited financial resources, which in turn allows investors to weigh and compare
projects’merits (Li and Cao, 2021). At the focal project level, sources of information disclosure
Investors’
herding
behavior
2763
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