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The information cascade in Equity Crowdfunding: the (limited) rationality of retail investors

Caterina Lucarelli, Francesco James Mazzocchini
March 2022 - n. 3
Keywords: Equity crowdfunding, asimmetrie informative, effetto herding, cascata informativa, esperimento di scelta, preferenze dichiarate
Jel codes: G11, G41

Based on theories of herding behaviour and information cascade, this paper investigates features that affect retail investors' willingness to invest in equity crowdfunding. This study assumes that investors can update their choice set by observing different sources of information, following an information cascade, in line with theories of signals and bounded rationality in decision-making under uncertainty. An online survey containing a discrete choice experiment was administered to 202 participants to investigate whether and how much they assume a herd behaviour and follow an information cascade to undertake investment decisions. To the best of our knowledge, this paper is the first to examine the empirical hierarchy of the sources of the information cascade. Our experimental evidence seems to indicate that retail investors observe and imitate the behavior of those investors who have shown effective financial involvement in the project, be they institutional investors or other retail investors. The hierarchy that emerges for the information sources used by the investors in Ecf appears ordered, therefore, according to a cascade that demonstrates a rationality, albeit limited, of their behavior, conditioned by the investors who are objectively more informed about the risk / return expected from the project. The nature of the information primarily observed in Ecf investment choices represents a value to be known and exploited both by innovative entrepreneurs looking for capital and by intermediaries operating in this segment of the financial industry.

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