Information Intermediation in Opaque Markets: Evidence from Equity Crowdfunding Analyst Reports

Abstract

Equity crowdfunding (ECF) is a growing market in the U.S., where firms issue unregistered securities to the public over the Internet. This market is characterized as informationally opaque and dominated by unsophisticated retail investors. I provide the first evidence with respect to information intermediation in this market by examining the role of KingsCrowd (KC), the sole ECF information intermediary that provides analyst reports for a selected subset of Regulation Crowdfunding offerings. I find a 136% (298%) increase in average weekly web traffic to the KC report page (platform click-throughs) the week a report is released, consistent with investors acquiring reports and considering an investment on the offering platform. I find a one unit increase in the report recommendation favorableness is associated with a 17-19% increase in average daily investment pledges. Further, this effect is more heavily concentrated in the first three weeks following the release of a report, whereby a one unit increase in report favorableness is associated with a 22-27% increase in average daily investment pledges, and less thereafter. In terms of dollar magnitude, a one unit increase in report favorableness is associated with a $25,076 increase in investment pledges over the nine weeks following the report release. The collective evidence suggests information intermediation by KC in the form of recommendations are utilized by investors when making investment decisions in the opaque ECF market.