Insights

Crowdfunding, also known as mass fundraising or crowdfunding, is a financing method that utilizes an Internet platform whereby the initiator proposes a project and investors provide financial support for the interested project. Under the new wave of mass entrepreneurship and innovation, crowdfunding platforms are becoming more and more an important channel for startups to raise funds, and they are also popular among small and medium-sized enterprises. A key characteristic of this financing model is its strong reliance on online social networks. For example, promoters usually share their projects through social media platforms such as Facebook, Twitter, Instagram, etc., to attract the support of friends, family, and fans. At the same time, supporters disseminate information through the network to help the project gain more attention and funding. Recently, a study of Professor Zhang Lingyi of the School of Management and Economics, The Chinese University of Hong Kong, Shenzhen, Unleashing the Crowd: the Effect of Social Networks in Crowdfunding Markets has been accepted for publication in the top international journal Management Science, by analyzing the phenomenon of social networks in crowdfunding markets, and revealing the important role of peer socialization and social connections on investor decision-making and project financing.

Author

Zhang Linyi

Assistant Professor, School of Management and Economics, CUHK-Shenzhen

Research Area

Innovation and Entrepreneurship, Chinese Economy, and Applied Microeconomics

Abstract

We identify the crucial role social networks play in crowdfunding markets. Investors are 50% more likely to fund projects that their peers support and are 11.2% more likely to fund projects from regions where they share strong social ties, given a one standard deviation change in the variables. More influential peers exert a greater influence, especially in the case of riskier projects, and the peer effects are amplified in crowdfunding platforms that prioritize transparency and accountability. Social ties transmit information about economic conditions in project locations, and they complement the influence of peer effects. Furthermore, the social network effects affect project funding outcomes and can be particularly valuable in mitigating the adverse impact of natural disasters. Our findings suggest that social networks play a significant role in crowdfunding markets by increasing investor awareness, disseminating information, and ultimately influencing capital allocations.