An Empirical Study of the Dynamic and Differential Effects of Prefunding

Posted: 9 Jul 2019 Last revised: 28 Sep 2020

See all articles by Xiahua Wei

Xiahua Wei

University of Washington, Bothell School of Business

Ming Fan

University of Washington - Michael G. Foster School of Business

Weijia You

Beijing Forestry University

Yong Tan

University of Washington - Michael G. Foster School of Business

Date Written: July 9, 2019

Abstract

This paper investigates the dynamic and differential effects of prefunding on reward-based crowdfunding markets plagued by information asymmetry. Prefunding, an innovative feature in crowdfunding, enables founders to share project information with potential backers before fundraising begins. By collecting and analyzing daily project-level panel data from one of the world’s largest crowdfunding platforms, we found that projects with the prefunding feature were more likely to succeed in reaching their funding goals and the effects of prefunding on the amount of funds raised remained positive and significant over time. In probing why this occurred, we used text analyses and revealed that the mechanism driving the funding premium was the specific types of prefunding information shared between founders and potential backers (volume, length, and sentiment). Further, in examining the sources of funds, we found that prefunding information first attracts funding from regular backers, followed by lottery backers. This herding behavior creates two intertwined funding streams—a primary and a secondary—for prefunding projects. Finally, using counterfactual decomposition analysis, we identified the types of projects that benefited the most from prefunding and found that prefunding democratizes funding outcomes. These findings and insights into information sharing, herding, and differential effects of prefunding contribute to the OM-IS research on operational designs of reward-based crowdfunding platforms that serve early-stage ventures in online environments with minimal informational oversight and regulations.

Keywords: Crowdfunding, Information Asymmetry, Prefunding, Dynamic Effects, Herding, Counterfactual Decomposition

Suggested Citation

Wei, Xiahua and Fan, Ming and You, Weijia and Tan, Yong, An Empirical Study of the Dynamic and Differential Effects of Prefunding (July 9, 2019). Available at SSRN: https://ssrn.com/abstract=3415736 or http://dx.doi.org/10.2139/ssrn.3415736

Xiahua Wei (Contact Author)

University of Washington, Bothell School of Business ( email )

18115 Campus Way NE
Bothell, WA 98011-8246
United States

Ming Fan

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Weijia You

Beijing Forestry University ( email )

35 Qinghua E Rd.
WuDaoKou
Beijing, Haidian Qu 100085
China

Yong Tan

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3226
United States

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