Puzzles of the crowd: Investors' perceptions of information asymmetry and agency problems in equity crowdfunding

Abstract: Equity crowdfunding is an emerging type of financing, providing small firms with a new source of capital and small private investors with new investment opportunities. Thereby, large crowds of small private investors are introduced to a context suggested to be particularly informationally opaque and where agency challenges exist. This thesis explores how the equity crowdfunding investors perceive issues of information asymmetry and agency, and how they are mitigating these potential problems. A single-case study was performed in which data was collected through semi-structured interviews with seven investors that had invested through the Swedish equity crowdfunding platform FundedByMe. Our study suggests that small private investors investing in highly uncertain and risky small firms consider information asymmetry and agency as being prevalent problems but exert limited efforts into mitigating these. Of the efforts pursued, the findings show that the investors' due diligence focused mainly on the characteristics of the management team and that importance was given to the signalling of already committed capital. We argue that the investors' typically low investment sizes explain the limited extent of their mitigating efforts, but also that the investors expect the intermediating platform to signal firm quality, thus expecting the platform to overcome some of the information asymmetries on their behalf.