Economic Consequences of Risk and Ability Disclosures: Evidence From Crowdfunding

Abstract

We exploit the introduction of a "risks and challenges" (RC) section on the crowdfunding website Kickstarter.com to study the role of disclosure in markets characterized by severe information asymmetries and agency frictions. Although the RC section contains voluntary and unaudited disclosures, after its addition projects with already observably risky characteristics attract fewer backers and are less likely to be funded, and project creators who respond to the prompt to discuss risks and abilities increase their non-risk disclosures and use a financing structure that accommodates greater risk. Risky projects attract relatively more backers and funding when project creators respond to the prompt, consistent with increased disclosure mitigating market frictions. Our findings suggest that crowdfunders change the types of projects they support and that project creators modify their disclosures and financing structure when prompted to consider risks.