In equity crowdfunding, it is unclear whether unsophisticated inexperienced crowd investors are capable of correctly interpreting ventures’ quality signals, even strong ones like affiliation with venture capital investors. Because of cognitive limitations, crowd investors may consider signals revealing platform’s private information on issuers’ quality to be more informative than ventures’ signals. Our findings based on 550 equity crowdfunding offerings in the U.S. show that the positive effect of affiliation with VCs on the success of equity crowdfunding campaigns is mediated by platforms’ choice of an equity compensation (i.e. their “skin in the game”) but only very partially. We deduce that crowd investors’ cognitive limitations may be less severe than one may believe.
JEL Classification: D26, G24, L26, M13