Information Asymmetries in Bank Lending, with the Moderating Effect of Entrepreneurship: A Driver of Equity Crowdfunding

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Master’s Thesis International Business & Management

June 2020

Information Asymmetries in Bank Lending,

with the Moderating Effect of

Entrepreneurship: A Driver of Equity

Crowdfunding

AUTHOR

Tiago Lopes (S4015258)

SUPERVISOR

Dr. A. Kuiken

CO-ASSESSOR

Dr. M.C. Sestu

Word count: 16451

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Abstract

The exponential adoption of equity crowdfunding platforms by SMEs had as its catalyst the Global Financial Crisis in 2008, yet detailed research surrounding the conditions that drive SMEs towards these platforms remains sparse. Much prior research has instead focused on the factors that contribute to a successful campaign on these platforms. By drawing on the pecking order and information asymmetry theory, this paper explores the assertion that when SMEs seek bank credit greater information asymmetries will contribute to a higher amount of equity crowdfunding being raised in that country. Additionally, this research assesses the relationship between the drive towards equity crowdfunding platforms and the level of entrepreneurial activity in a country. One of the first quantitative studies in this area is provided by manually constructing a unique sample gathered from the most used equity crowdfunding platforms in the European Union. The sample consists of firms that have successfully obtained funding via these platforms, across 13 European Union countries between 2014 and 2019. In general, the empirical evidence supports the aforementioned theory. I find that an increase in depth of credit information that banks have on SMEs leads to smaller amounts of equity crowdfunding raised. Moreover, the strength of the legal rights of both banks and borrowers, and the existence of a credit registry are found to have a negative effect on the amounts raised. Finally, it is clear that the more entrepreneurial the country and the higher the amounts of equity crowdfunding being raised, the stronger the effect of all the above-mentioned variables. The implications of such findings for theory and practice are outlined in this paper.

Keywords: Bank credit; Entrepreneurial finance; Equity crowdfunding; Information

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Introduction

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asymmetries has equally been overlooked. Information asymmetries are detrimental for the formation of loan contracts between SMEs and banks. Thus, especially in a time of potentially stricter banking regulations (Binham, 2019), these can further hinder SME’s ability to obtain bank credit (Deakins & Hussain, 1994: 24), illustrated by the rising adoption of equity crowdfunding by European users (Zhang et al., 2018: 41-42; Ziegler et al., 2017). The growing importance of equity crowdfunding, together with its potential benefits, the absence of data and the existing information asymmetries, highlights the research gap (Esho & Verhoef, 2018: 21-22; Habla & Broby, 2019: 6-9). Thus, I address the following research question: How do countries’ information asymmetries between

banks and SMEs influence the amounts of equity crowdfunding being raised?

To test this claim, a web scraper is used to gather data from 15 equity crowdfunding platforms of 13 European Union (EU) countries for firms between 2014 and 2019. This is then combined with data from The World Bank on countries’ information asymmetry indexes. A quantile regression for panel data with bootstrapped standard errors is employed.

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Theoretical framework

I. Crowdfunding

Crowdfunding is a phenomenon that has spanned across many centuries, although without the terminology that we can encounter today. On March 16, 1885 Joseph Pulitzer funded the completion of the Statue of Liberty, by appealing to his newspaper’s audience. He was able to collect more than 100,000 thousand dollars in donations from roughly 125,000 thousand people (National Park Service, 2015). This practice was not as uncommon as one might think. However, the average entrepreneur did not have the means nor the resources to appeal to mass audiences. Posterior to the advent of the internet, these barriers began to progressively disappear. Technological advancements, namely the web 2.0, allowed for the surge of crowdfunding platforms (Ordanini et al., 2011), which, compounded by a more digital society, led individuals towards these platforms. However, only after 2013 did equity crowdfunding truly begin to be more widely adopted by firms and recognized as a valid alternative financing source (Appendix A). Thus, only a study that encapsulates the years that followed can fully provide a comprehensive analysis of this phenomenon.

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In regard to the lending model, investors receive an interest rate in exchange for the amount they have lent to the individual borrowers (Lin, Prabhala, & Viswanathan, 2013). Lastly, the equity crowdfunding model, allows for entrepreneurs to sell an equity stake in their business, similarly to the way VC operates. It is an innovative and recent method for SMEs to raise capital and it is paving the way for entrepreneurial finance, namely on early stage financing (Vulkan, Åstebro, & Sierra, 2016).

Overall, the crowdfunding literature has mainly focused on four streams. Firstly, the determinants of a successful campaign. Some of the main findings were that firms which (1) aim at solving a social issue, (2) request for smaller amounts of funding and (3) are geographically closer to their capital providers (i.e., investors), are more likely to obtain funding (Belleflamme et al., 2013, 2014; Goldfarb & Working, 2011; Mollick, 2014). Secondly, the herding behaviour on crowdfunding platforms. It was found that capital providers tend to contribute more towards projects which are closer to obtaining funding or that are being backed by well-established investors. (Herzenstein et al., 2011; Kuppuswamy & Bayus, 2018; Lee & Lee, 2012; Yum et al., 2012; Zhang & Liu, 2012). Thirdly, companies’ motivation to use crowdfunding. The main reasons are to obtain (1) funds, (2) public attention and (3) feedback (Belleflamme et al., 2013; Burtch et al., 2013). Lastly, research has also focused on what brings the capital providers to the platforms. The motives encompass not only financial reasons, but also social reputation and intrinsic values play a key role (Allison et al., 2015; Lin et al., 2014; Ordanini et al., 2011). Current research mainly focuses on the dynamics between implementing new regulation to foster these new forms of financing for SMEs and the extent to which it hinders investors’ protection (Härkönen, 2017; Hornuf & Schwienbacher, 2017; Huang, 2018; Ridley, 2016).

(i) Equity crowdfunding

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SMEs (Cholakova & Clarysse, 2015; Cumming & Johan, 2013). Secondly, as opposed to the reward-based and donation-based crowdfunding, projects on equity crowdfunding are by definition related to firms. For instance, reward-based crowdfunding platforms is associated predominantly with artistic and creative ventures (Cox & Nguyen, 2018). Thirdly, equity crowdfunding provides investors with voting rights, improving the attractiveness of the platform for professional investors (Cumming, Meoli, & Vismara, 2019). Moreover, there are plenty of valid reasons which can lead firms to opt for equity crowdfunding instead of bank credit. Firstly, the marginal cost of debt financing progressively increases at a faster pace the more debt a firm has. Hence, potentially leading to financial distress (Carpenter & Petersen, 2002). Thus, firms with excessive debt will be more likely to seek equity crowdfunding (Walthoff-Borm, Schwienbacher, & Vanacker, 2018). Secondly, firms with more intangible assets will seek this source of financing, as they find it difficult to obtain funding from banks (Walthoff-Borm et al., 2018). As we will see in section (ii) of the Regulation chapter, an increasingly higher proportion of SMEs’ assets are intangible (Brassel & Boschmans, 2018), which hinders their ability to attract debt financing (Cassar, 2004). Thirdly, these firms are also attracted towards these platforms as they can be more efficiently exploited and are experts in providing a better, cheaper and faster service (Agrawal, Catalini, & Goldfarb, 2013). Lastly, in the period that followed the GFC, central banks cut interest rates to promote economic activity, thus making debt financing relatively cheap (FSB, 2019). However, this was only provided that the SMEs were low-risk and had enough track record and collateral to comply with the post-crisis measures introduced (Block et al., 2018). As a consequence of the low interest rates, investors were seeking other investment opportunities. Equity crowdfunding platforms benefited from this shift, attracting investors and beginning to established themselves as a valuable source of financing for firms (Kraemer-eis, Botsari, Gvetadze, Lang, & Torfs, 2018). Thus, expanding the financing options of these more innovative and high-risk firms (Block et al., 2018). Overall, there are tangible reasons for firms to opt for this source of financing, which is further illustrated by the increase both in the literature (Mochkabadi & Volkmann, 2020: 1-2; Vulkan, Åstebro, & Sierra, 2016) and in its adoption by users and firms (Hannah Skingle, 2019; Ziegler et al., 2017).

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the impact of banking regulation on firms opting for equity crowdfunding. The importance of identifying this relationship is underscored by previous scholars having sought to understand a similar link on other alternative financing sources. For example, scholars focusing on trade credit have shown that SMEs with little access to bank credit or that are credit-rationed (i.e., loan applications are rejected straight away) resort more to trade credit (Casey & O’Toole, 2014; Ogawa et al., 2013). Trade credit is when “a firm pays its suppliers with a lag which creates the equivalent of a loan” (Esho & Verhoef, 2018: 11) and it has been the most or second most popular alternative to bank credit in recent years (Kraemer-eis et al., 2018). Moreover, scholars have also found that the use of trade credit tends to increase during a financial crisis (i.e., banks restrict some firms’ loans) (McGuinness & Hogan, 2016; Nilsen, 2002). Additionally, country-level variables also play a role in the easiness of obtaining such credit (Andrieu, Staglianò, & van der Zwan, 2018). Basically, several papers have been published that sought to understand how SMEs, which are heavily dependent on bank credit, react to a tightening of credit conditions.It is also noteworthy that an abundance of empirical evidence has been geared toward VC funding (for a reflection on the field see Harrison & Mason (2019)). However, equity crowdfunding is a meaningful substitute for traditional VC (D’Ambrosio & Gianfrate, 2016). Thus, the study of its role as a substitute of bank credit is of equal or greater importance, given its increasingly higher adoption.

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Borm et al. (2018), it is possible to verify that they use the information asymmetry theory, but solely the firm’s side. That is, the more debt a firm has, the higher the likelihood to opt for equity crowdfunding. By doing so, it ignores the more prevalent issue that firms encounter, namely SMEs. This pertains with the difficulty to obtain the still very much needed credit from banks (European Commission, 2019b). Thus, ignoring the general unwillingness of banks to provide credit to these firms and how equity crowdfunding can be an alternative to established forms of early-stage venture financing, such as bank loans (Mochkabadi & Volkmann, 2020: 83). In essence, firms’ choice for equity crowdfunding is not only dependent on their characteristics, but also on the existing information asymmetries that hinder banks’ willingness to provide capital to these firms. Such information asymmetries arose largely from the banking regulations imposed during and after the GFC, and these regulations are at risk of being further strengthen in the following years. Thus, further aggravating the existing information asymmetries between banks and SMEs and consequently damaging firms’ ability to capture bank credit. This is the topic covered in the following section.

II. Regulation

(i) Banks

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amplified the general prevalent difficulties that SMEs face when trying to obtain funding (Blaseg & Koetter, 2015: 2).

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(BCBS, 2010a). There are three main principles of the Basel III framework. These principles will now be outlined, in order to illustrate how these measures further constrained SMEs in the process of obtaining credit from banks.

1. Minimum capital requirements – capital reserves act as a buffer to absorb shocks

during periods of financial crisis. During the crisis, the total minimum equity requirement increased to 7% of the risk-weighted assets (BCBS, 2010b; CFI, n.d.). In other words, the higher the risk of the total assets held by the bank the greater the requirement to have in possession more easily sold assets (Chen, 2019). This new requirement dampens lending when the economy is in periods of growth and encourages lending in times of crisis (Committee on the Global Financial System, 2018: 64). Moreover, as per Bridges et al. (2014), on the year that follows an increase in capital requirements, banks cut on the loans provided taking as much as three years for these to return to normal levels. This is of particular interest, especially in a period in which further capital requirements are planned to be implemented by 2022 (Binham, 2019). Additionally, and in line with the aforementioned papers, Michael Lever – head of AFME’s1_prudential

regulatory division – highlighted the fact that having banks holding more capital can have additional negative consequences on the supply of credit (Binham, 2019).

2. Liquidity requirements – during the beginning of the GFC it became apparent that

many banks, although some with adequate capital levels, had insufficient levels of liquidity. When the market conditions changed the shortage of liquidity put the banking system under severe stress, as they could no longer meet their immediate obligations (i.e., repay loans, pay ongoing operational bills) (BCBS, 2010a: 3; Chappelow, 2019). Therefore, to tackle this problem two standards were implemented. Firstly, the Liquidity Coverage Ratio requires banks to maintain and adequate level of assets that can be easily converted to cash, in order for it to meet its short-term (i.e., 30 days) obligations, whilst in a scenario of liquidity impairment (BCBS, 2010a: 5; CFI, n.d.). Secondly, Basel III also implemented the Net Stable Funding Ratio. This ratio has the goal of limiting the banks’

over-1_{The Association for Financial Markets in Europe (AFME) represents the global and European leading}

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reliance on short-term wholesale funding (e.g., deposits). Thus, promoting banks to opt for more stable long-term funding of business activities (BCBS, 2010a: 27). Overall, banks have undergone periods of stress because they did not have (1) enough capital, (2) liquidity or (3) a combination of both. Bank liquidity is a relevant determinant of bank lending (Alper, Hulagu, & Keles, 2012). By drawing further on the topic, it is possible to understand from Hoerova, Mendicino, Nikolov, Schepens, & Van den Heuvel (2018: 27–31) paper, that liquidity requirements make banks safer. However, it also leads to banks being more risk-averse when it comes to the loans conceded. Thus, it hampers banks’ ability to create net liquidity (i.e., use deposits to fund loans), which is one of banks’ raisons

d’être.

3. Leverage ratio – one of the underlying reasons of the crisis was the excessive

leverage banks had taken (BCBS, 2010b: 61). Put it simply, banks were using too much “borrowed” money from clients’ deposits to finance loans. Therefore, in order to push banks to use more of their own capital for financing purposes, a ratio was implemented to constraint the level of debt that can be used (BCBS, 2010b: 61; Carney, 2013). This ratio builds on the capital requirements implemented. Thus, its benefits and costs are similar to the aforementioned requirement (Gambacorta & Karmakar, 2018).

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to obtain funding from these banks gets hindered, as banks in situations of tighter lending conditions need to screen more accurately the firms which they are willing to finance (Paulet, 2018). Thus, particularly when the banking sector is financially constrained, it is of the utmost importance for EU policymakers to explore alternative lending forms (Sapir & Wolff, 2013), such as equity crowdfunding. All of the above, highlights further the importance of studying SMEs’ alternative lending options. The above-mentioned credit constraints are greatly accentuated by the well-known information asymmetries between banks and SMEs. This is the topic covered in the following section.

(ii) Information asymmetries

The foundation for the information asymmetry theory was laid down when Akerlof (1970) raised the question: how can investors select projects from a group of opaque applicants?

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tangible assets. Thus, the investors cannot resort to these to assess the firm’s value. Secondly, as highlighted before, equity funding investors are primarily interested in financial returns. The highest returns are often linked with business models and technologies that are disruptive and innovative which is mainly associated with intangible assets. Thirdly, firms must have entry barriers to discourage potential competitors, which is primarily achieved through the use of patents. Overall, firms will less tangible assets will be pushed towards using equity financing (Mac an Bhaird & Lucey, 2010; Vanacker & Manigart, 2010).

Information asymmetries between firms and potential investors results in the pecking order theory, as pioneered by Myers & Majluf (1984). The authors posit that in the presence of information asymmetries, a firm will prefer to obtain financing beginning with (1) internal funds, followed by (2) debt and (3) equity, in order to minimize the costs of adverse selection. This theory is particularly suitable for this study, because of the high information asymmetry that characterizes the entrepreneurial setting (Cassar, 2004). Bharath, Pasquariello, & Wu (2009), find supportive evidence for the pecking order hypothesis, showing that information asymmetries are an important determinant of the level of debt a company takes on. Additionally, this theory is also of extreme relevancy when it comes to firms in the beginning of their life. In the vast majority of cases, this is when firms are not attractive to the types of funding sources discussed in the early-stage financing literature (e.g., VC). Thus, these companies tend to be heavily dependent on outside debt in the beginning of their venture’s life, mostly due to its availability (Robb & Robinson, 2014).

A recent way to reduce transaction costs in entrepreneurial financing is crowdfunding. Amongst the different types of crowdfunding available, the equity-based one can act as a complement or a substitute for entrepreneurial ventures that have difficulties in raising capital from traditional sources (e.g., bank loans, VC).

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helps with problem-solving and decision-making. Thus, the information asymmetries will be minimized as investors will take advantage of the collective intelligence of the marketplace. For example, if a company returns to the platform after being successfully funded, investors will weigh that information more favourably when deciding about their potential investment in the company (Yum et al., 2012). Overall, in recent academic literature, crowdfunding and equity crowdfunding in particular have been mentioned as potential paths for entrepreneurs to take, in order to overcome the financing constraints highlighted throughout the paper (e.g., Blaseg & Koetter, 2015; Hornuf & Schwienbacher, 2015; Vulkan et al., 2016).

Generally, it is widely acknowledged the importance that SMEs have in the EU, especially as a source of employment (European Commission, 2019a: 17–23). Nevertheless, as elucidated before, bankers care mostly about a firm’s creditworthiness. Therefore, they are more risk-averse to provide loans to informationally opaque firms with low-quality or inexistent collateral. In the aftermath of the GFC, the financing challenges that SMEs face were aggravated, namely for young, fast-growing and innovative ventures (OECD, 2020: 77). These challenges vary in terms of their impact across the different jurisdictions in the EU, as they are dependent on the financial systems and macroeconomic conditions of each country (FSB, 2019). All in all, equity crowdfunding appears as suitable alternative of the traditional funding sources, by minimizing the information asymmetries between the investor and the borrower. While drawing on the pecking order theory, this study will be able to assess how the changes in information asymmetries in bank lending across the different countries push firms to seek other sources of financing, namely equity crowdfunding.

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for borrowers. The following section will proceed to explain each of these country-level variables.

III. Hypotheses Development

(i) Strength of legal rights

Previous measures of legal rights (e.g., Haselmann, Pistor, & Vig, 2010; Qian & Strahan, 2007) focused solely on the rights which creditors have. However, for the purpose of this research, it is of the utmost importance to also take into account borrowers’ rights. As outlined by some scholarly papers (Ferrando & Mulier, 2015; Freel, Carter, Tagg, & Mason, 2012; Kon & Storey, 2003), information asymmetries can equally discourage firms to search for bank credit, regardless of their creditworthiness. For example, Vig (2013) demonstrated that a regulatory change in India which strengthen the rights of creditors led to an additional cost for firms. Consequently, contributing to a reduction in the use of credit by these. In essence, borrowers’ rights should also be taken into account.

For now, it is important to distinguish between collateral and bankruptcy. Collateral determines the type and scope of the security that a bank can obtain from a firm (e.g., mortgage land). Apart from what was mentioned in the earlier sub-section (ii), collateral offers two advantages (Haselmann et al., 2010: 556–558). Firstly, it facilitates banks’ enforcement against a firm in a default situation. In other words, collateral protects the bank when the firm falls behind on the payments. Secondly, if a firm becomes insolvent a bank which has collateral against that firm, will have priority against competing claims by other creditors. On the other hand, bankruptcy governs the procedure that takes place upon the insolvency of a firm with multiple creditors, each seeking their respective amount that is owed (Baird, 1992). From banks’ perspective having a good bankruptcy regime in place is far better than not having one. The reason behind it is because the former will not delay as much the enforcement of bank’s claims over an insolvent firm’s assets.

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as lenders with a better legal protection during bankruptcy will become more confident in their investment (Djankov, McLiesh, & Shleifer, 2007). This is of special importance namely for SMEs, due to their riskiness, high failure rates and poor performance levels (Lampadarios et al., 2017). With better legal rights, banks will be able to offset the risk and ease the regulatory burden when lending to SMEs. Moreover, improvements on the banks’ rights benefits small borrowers more than large corporations, especially when accompanied by collateral reforms (Haselmann et al., 2010). Haselmann et al., (2010) find that an improvement in collateral laws leads to firms changing their capital structure to accommodate for more debt. Moreover, as per the rationales highlighted in previous sections there are a sufficient number of reasons that can lead some SMEs to use equity crowdfunding. Firstly, as per the equity crowdfunding sub-section, (1) when firms reach a certain level of debt they need to resort to equity financing, (2) these platforms provide a better and cheaper service than more traditional financiers and (3) high-risk firms have a higher chance of receiving funding in these platforms, as investors have been seeking other investment opportunities due to the prevalent low interest rates. Secondly, in the

information asymmetries sub-section, I drew further on the attractiveness of equity

crowdfunding platforms due to their ability to reduce information asymmetries. Thirdly, in the same sub-section, it was outlined the role of equity crowdfunding’s investors due to their higher preference for SMEs with more predominant intangible assets. Thus, all in all, and in line with the overall theoretical framework provided so far, I posit the following:

Hypothesis 1. On average, countries with stronger legal rights will be associated

with a proportionally lower amount of equity crowdfunding being raised compared with countries with weaker legal rights.

(ii) Depth of credit information and credit registry

Apart from the strength of legal rights, the depth of credit information is also worth highlighting. Credit information is dependent, for example, on the existing credit registries, which are important determinants of the contracting environment between banks and firms (Qian & Strahan, 2007). Thus, have a potential role in reducing information asymmetries.

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database managed by the public sector (e.g., central bank), that collects information on the creditworthiness of the different borrowers. Additionally, it facilitates the exchange of information amongst banks and other financial institutions (Jappelli & Pagano, 2002). However, the depth of credit information that these institutions provide is influenced by the country’s environment (Houston, Lin, Lin, & Ma, 2010: 487). Credit information tracks the rules that affect the coverage, scope and accessibility of credit information through a credit registry. The amount of information that is collected by each registry varies. Some agencies only collect information on outstanding loans of large borrowers, whereas other agencies distribute extensive information (e.g., late payments, defaults, demographic data, credit inquiries, court records of the company and its owners) (Djankov et al., 2007). With the information provided by these institutions, when lending, banks can make objective decisions based on past borrowing behaviour (Brown, Jappelli, & Pagano, 2009). Ultimately, increasing small firms’ access to financing (Pagano & Jappelli, 1993). From the borrowers’ side, credit information sharing acts as a disciplinary measure. Borrowers tend to have a greater incentive to repay back the loans when they know that by defaulting on loans from one bank, they may be jeopardising their access to funding from other banks (Padilla & Pagano, 2000). Thus, as per the The World Bank (n.d.), “by sharing credit information, these institutions help to reduce information asymmetries, increase access to credit for small firms, lower interest rates, improve borrower discipline and support bank supervision and credit risk monitoring”. Based on the above and the reasons highlighted so far for the use of equity crowdfunding, I posit the following:

Hypothesis 2a. On average, countries with a better credit information sharing

will be associated with a proportionally lower amount of equity crowdfunding being raised compared with countries with worse credit information sharing.

Hypothesis 2b. On average, countries with a credit registry will be associated

with a proportionally lower amount of equity crowdfunding being raised compared with countries with worse credit information sharing.

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Figure 2 - Credit information sharing and use of collateral (The World Bank, n.d.)

(iii) Entrepreneurship

Entrepreneurship plays a key role in the modern market economy. Countries with a higher percentage of firm registrations see a greater increase of competition and economic growth (Djankov, La Porta, Lopez-de-Silanes, & Shleifer, 2002; Lerner, Schoar, Klapper, Amit, & Guillén, 2007). Entrepreneurship is often defined as “the nexus of two phenomena: the presence of lucrative opportunities and the presence of enterprising individuals” (Venkataraman, 1997). SMEs have a great importance in fostering growth and generating jobs (Musso & Francioni, 2014: 1). Thus, as per definition, a higher amount of firm creation will result in a wider range of products, more competition amongst firms and better technology (Kasseeah, 2016: 897).

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studying the former across different countries. Additionally, Ho & Wong (2007) also highlight the influence of the availability of financing sources, namely informal investors (e.g., angle investors) on one’s propensity to become an entrepreneur. Even though the aforementioned study preceded the appearance of equity crowdfunding, this new method of alternative financing fits in the definition of informal investors. Thus, its presence helps in widening the availability of financing sources, hence should lead to the same outcome highlighted by Ho & Wong (2007). Overall, countries with more extensive financing sources will have a higher number of newly registered firms. Consequently, and by definition, firms’ use of financing should equally grow, as firms, namely start-ups, need to raise capital to implement their novel ideas.

Overall, it has been established (1) the importance of a cross-country study of entrepreneurship and (2) that a higher percentage of entrepreneurship leads to a higher demand for funding. Additionally, as per the reasons highlighted in the earlier section, informational asymmetries lead firms to look for other forms of financing, namely equity crowdfunding. Taking everything into account, a higher presence of newly registered firms will only accentuate the difficulties faced by firms and their need for alternative financing sources. Alike other studies (e.g., Kasseeah, 2016), I measure entrepreneurship as the new business density of a country. Against this background, I posit the following:

Hypothesis 3. At the mean level, the level of new business density will positively

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Methodology

This study analyses how information asymmetries can be positively associated with companies seeking alternative financing sources, namely equity crowdfunding. This is tested at the country-level by using the total equity crowdfunding raised between 2014 and 2019, in each EU country. The hypotheses above mentioned are tested using a quantile regression for panel data with bootstrapped standard errors. In total, the sample consists of 13 EU countries.

I. Sample

The present research relies on a sample of 15 platforms. The focus of this study is in all the countries in Table 1, apart from the UK. The UK represents the vast majority of crowdfunding in Europe. Thus, similarly to other studies (e.g., Buzwani et al., 2020; Zhang et al., 2018), it is more worthwhile to investigate the UK separately given its dimension, as it would also likely skew the results. The initial goal was to create a database which would provide a proxy of the total funding amount raised by firms in each year on the different equity crowdfunding platforms. The study employs a relatively small sample, represented by a total of 13 countries from 2014 to 2019. The small sample size is justified by equity crowdfunding still not being a widely spread phenomenon in the EU. Thus, a variety of countries still do not have (1) equity crowdfunding platforms and/or (2) a significant amount of funding being raised via these equity-based deals. Therefore, a sample with a total 78 observations is employed. The sample was obtained in two main steps.

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release of the European report in 2015, thus allowing for a longitudinal analysis. These reports are of extreme relevance mainly due to the lack of (reliable) sources providing a macro perspective on this up and coming financing option. The report on the European landscape (Ziegler et al., 2019) provides a breakdown per country of the total equity crowdfunding amount raised since 2015 up until 2017. Table 1 was built based on the overall amounts reported.

Table 1 – Equity crowdfunding amount raised per country in the EU between 2015 and

2017

Country Total equity crowdfunding volume Total Average

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Luxembourg - - - - -

Malta - - - - -

Romania - - - - -

Note: The table is organized in descending order (i.e., from the country with the highest total amount raised to the least). All the 27 EU countries are included. The countries for which the total amount is 0 did not have any equity financing volume reported. Additionally, for the bottom six countries no information was available in the report regarding the (non)existence of equity crowdfunding volume in the country. All the

values displayed are in Millions of euros.

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apart from still not having an equity platform in place, the same reasoning applies. Overall, as already highlighted 13 countries were considered: Austria, Belgium, Denmark,

Estonia, Finland, Germany, Ireland, Italy, Netherlands, Poland, Portugal, Spain and Sweden. This leads us to the second step of the construction of this sample.

II. Data collection process and sources

(i) Dependent variable

There was not a main data source, but rather a manual collection of the information from the different equity crowdfunding websites. Similarly, to other crowdfunding-centered studies, the data obtained was continuously pulled from the different platforms (Blaseg & Koetter, 2015; Walthoff-Borm et al., 2018). Moreover, due to equity crowdfunding being a global phenomenon, the data available is often decentralized and dispersed (Stasik & Wilczyńska, 2018: 53). Thus, there is still a need to manually collect one’s required data. In regard to the collection of data per se, most platforms offer the possibility to browse through past (un)successful campaigns. However, due to the extensive time-consuming task, several big data methods have been employed to shorten the time frame needed for obtaining such data. As highlighted by Stasik & Wilczyńska (2018: 60), in their review of the techniques used to study crowdfunding, the vast majority of platform-centered studies have focused on using big data analysis to retrieve data on past campaigns. One of the options available is through a web scraper.

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Subsequently to the research mentioned in the previous sub-section, most of the major equity crowdfunding platforms of each country were scrapped (i.e., 12), in order to obtain the needed information. For the remaining platforms (i.e., 3), the data was manually collected, as they did not have a sufficient number of campaigns that would make it worthwhile to scrap them. For each platform, I collected the following data: (1) name of the company, (2) country where the firm is from, (3) year when it obtained the funding and (4) the total amount of funding raised. One major setback was the fact that not all the equity crowdfunding websites had all the data needed, namely the year of the funding. The missing information was obtained via (1) the companies’ social media accounts (e.g., LinkedIn, Facebook), as firms often promote their campaigns there, (2) news articles, (3) companies financial statements submitted in the platform and (4) crowdfunding directories. Please refer to Appendix D for a more in-depth review of all the challenges encountered and the solutions implemented when dealing with the data extracted.

Overall, these efforts resulted in a comprehensive sample of each country, regarding the total yearly funding obtained from the most used European equity crowdfunding platforms. Therefore, a dataset covering 15 platforms across 13 countries between 2014 and 2019 was employed in this study. Table 2 presents (1) all the platforms used in this study, (2) their country and (3) website where the information was retrieved from.

Table 2 – Equity crowdfunding platforms used

Country Platform Website

Austria Green Rocket https://www.greenrocket.com/

Belgium Spreds https://www.spreds.com/en

Denmark - -

Estonia Funderbeam https://www.funderbeam.com/

Finland Invesdor https://www.invesdor.com/en

Germany Seedmatch

Companisto

https://www.seedmatch.de/ https://www.companisto.com/en

Ireland Spark crowdfunding https://www.sparkcrowdfunding.com/

Italy Mamacrowd

Crowdfundme

https://mamacrowd.com/ https://www.crowdfundme.it/en/

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Poland Bessfund https://beesfund.com/

Portugal - -

Spain Startupxplore https://startupxplore.com/en

Sweden FundedByMe https://www.fundedbyme.com/en/

UK Seedrs

Crowdcube

https://www.seedrs.com/ https://www.crowdcube.com/

Note: There are two noteworthy comments. Firstly, in both Portugal’s and Denmark’s case no equity crowdfunding platforms exist. Nevertheless, Danish and Portuguese companies have obtained funding from other countries’ platforms, hence its inclusion as enough data is available. Secondly, UK firms are not included in the study. However, a vast number of European companies use UK’s platforms due to the higher presence of investors. Thus, those websites were equally scrapped to obtain information on the European firms.

(ii) Explanatory variables

Three main independent variables are considered in this study. The data on those variables was retrieved from The World Bank Doing Business Database. For the past 17 years, The World Bank has been measuring the regulations that improve business activity and those that hinder it. This data is harmonized at the country-level. Thus, one is able to compare the covered 12 areas of business regulation across 190 economies. In this study, the focus is on the getting credit indicator, which is decomposed in the three independent variables. However, due to the inherent differences between the variables, distinct collection procedures are applied by The World Bank. Overall, apart from the description of the methodological process provided in the next section, a more extensive explanation can be found in the website of The World Bank (n.d.). In general, the getting credit indicator from the Doing Business database is widely used in research and provides all the needed information, thus is a great fit for the present study. Moreover, its methodology has been supported by the much cited paper from Djankov et al. (2007).

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(iii) Control variables

Although the focus of this work is to study the impact of information asymmetries on firms opting for equity crowdfunding, other factors may also influence such decision. Thus, this study includes several control variables at the country level, to guarantee that the results obtained are not unjustifiably influenced by other factors. The control variables data was either retrieved from the Eurostat database or from The World Bank database. Both those sources compile information from national sources. Regarding the former, the Eurostat is the statistical office of the EU, thus has the goal of providing high quality statistics. Moreover, akin to the previous databases it also allows for comparability across the different countries (European Commission, 2020). The database’s reliability is underlined by the vast publications that have used it (European Commission, n.d.). Regarding the World Bank database, the same reasoning applies as the one of the previous sub-section.

III. Variables

Table 3 reports the summary statistics of the variables used in this analysis. Furthermore, an extensive description of each variable is provided below.

(i) Dependent variable

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bigger amounts of funding raised? Ultimately, not answering this question only provides a limited view on this issue. This is of special importance as the total amount of funding being raised each year via equity crowdfunding varies drastically depending on the year and the country where it is raised. Moreover, I focus on a range of countries, as institutional factors are likely to influence the equity crowdfunding ecosystem (Kshetri, 2015). Additionally, a cross-country analysis is imperative due to the regulatory differences in the European countries (Hornuf & Schwienbacher, 2017), as regulation at the EU level is still non-existent (Moritz & Block, 2016: 9). Overall, by employing the

Crowdfunding Total variable, this study is able to quantify how changes in the

independent variables impact the total amount of equity funding raised across the different sample subsets.

(ii) Explanatory variables

Strength of legal rights index – drawing further on what was highlighted on the Hypotheses Development chapter, this index measures to what extent is lending facilitated

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Djankov et al., 2007; Haselmann et al., 2010; Qian & Strahan, 2007) has equally used a similar index, which was initially designed by La Porta, Lopez-De-Silanes, Shleifer, & Vishny (1997) and later on adopted by The World Bank. Overall, this index captures not only the impact that certain laws have on SMEs securing bank financing, but also on “the relatively permanent features of the institutional environment, deeply rooted in national legal traditions” (Djankov et al., 2007: 307). This index ranges from 0 (weak legal rights) to 12 (strong legal rights) and the data for it is gathered through a questionnaire given to financial lawyers. The questionnaire data is verified across several follow-up rounds to assess its validity. Furthermore, publicly available laws and regulations on collateral and bankruptcy are analysed. In general, both this index and the depth of credit information one, do not change throughout the years within the same country, as the regulatory environment has remained rather stable. However, their values are distinct amongst the different countries. Thus, these questionnaires mainly aid in understanding the differences across countries. Overall, it allows for a cross-country comparison between all the countries in the sample.

Depth of credit information index – akin to the above index, in the Hypotheses Development chapter it was equally highlighted that the amount of information that is

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Credit registry – the information sharing highlighted above is driven by the

existence of the credit registry. Similarly to other studies (e.g., Djankov et al., 2007; Haselmann et al., 2010; Nketcha Nana, 2014; Qian & Strahan, 2007), I define as a dummy equal to one if a country has a private credit registry. The importance of this institution is underscored by the fact that information sharing only occurs due to its existence. Regarding the information collection process by The World Bank, this data follows a similar pattern to the one of the previous two variables.

New business density – as highlighted in the Hypotheses Development chapter, the

moderator variable measures the new business density. That is, the number of newly registered corporations per 1000 working-age people (i.e., ages 15-64). The new business density allows the measurements of activity across the different countries and over time. Thus, enabling the understanding between new firm creation and the regulatory environment (The World Bank, n.d.). Studies such as the one by Kasseeah (2016) have found that entrepreneurship has an important impact on economic development and that new business density can be used as a proxy of entrepreneurship. To collect the information required, interviews are done with the national business registries and other governmental statistical offices.

(iii) Control variables

For the following three variables the data was obtained via the Eurostat database, which is compiled from national sources. The greatest advantage of this data source is the fact that all the information is reported in euros. Thus, there is no need to perform a conversion of the values to the needed currency (i.e., euros). I will now begin to explain each variable.

GDP – tracks the gross national product of each country in millions of euros. This

study controls for the country’s total GDP, as it has been suggested that stronger economies have larger credit markets (Djankov et al., 2007; La Porta et al., 1997). Credit markets need fixed institutional costs to function. Thus, mainly due to economies of scale, larger economies tend to equally have bigger credit markets. Overall, these countries may be better able to provide funding to SMEs, hence influencing the results.

GDP growth rate – the use of this measure allows for comparisons of the

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(2007) and La Porta et al. (1997), I also control for the GDP growth rate, because faster growing economies tend to also have a greater demand for credit. Thus, possibly leading to fluctuations on the amount of equity crowdfunding raised depending on the country.

GDP per Capita – calculates the ratio of GDP to the average population of a

specific year (European Commission, 2020). It can be used as a proxy for the development in a country’s living standards. This measure has been proven to be positively correlated with the independent variables employed in this study (Nketcha Nana, 2014). Thus, it is an excellent measure to capture the differences in private credit, legal rights and information sharing which are reflected by the different levels of economic development.

For the following two variables the information was retrieved from The World Bank database. Similarly, to the above, all of the indicators are compiled from officially recognized international sources. The variables and the reasons for their inclusion are the following.

Inflation – reflects the annual percentage change in the cost to the average

consumer of acquiring a basket of goods and services (The World Bank, 2020). As per Djankov et al. (2007), inflation can decrease the value of outstanding debt. In other words, it can hinder the firms use of debt markets, especially when it comes to richer countries (Nketcha Nana, 2014) – such as the ones that can be found in this sample. In simpler terms, firms can mitigate informational frictions when seeking to obtain funding by resorting to internal funds. However, under higher inflation the value of money (e.g., firm’s internal funds) is eroded, thus a firm for any given investment project will be more dependent upon outside financing (Smith & van Egteren, 2005). Overall, inflation promotes investment. Crowdfunding, namely equity crowdfunding has the role of getting new ventures off the ground, which mainly consists in funding investment decisions (Hemer, 2011).

Domestic credit to private sector by banks – this variable captures the financial

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the difficulty in measuring the quality of financial intermediation, which has a first order effect on capital flows (Kasseeah, 2016). Moreover, a higher ratio of domestic credit to private sector by banks implies a higher demand for loans (Qian & Strahan, 2007: 2820), thus it can lead to a more residual use of equity crowdfunding.

Table 3 – Summary statistics: the full sample includes 78 observations across 13

countries between 2014 to 2019

N Mean SD Q 0.25 Q 0.5 Q 0.75 Q 0.90

Independent variable

Crowdfunding Total 78 4576762 6367266 342753 1648311 6736824 24549329

Explanatory variables

Strength of legal rights index 78 5.205 2.104 4 6 7 8

Depth of credit information index 78 6.641 0.925 6 7 7 8

Credit registry 78 0.474 0.503 0 0 1 1

New business density 78 5.548 5.139 2.559 3.979 7.119 25.448

Control variables

Inflation 78 0.912 0.91 0.25 0.853 1.606 3.436

GDP growth rate 78 2.831 3.07 1.6 2.2 3.1 25.2

GDP 78 731128 838110 262833 421628.5 774039 3435760

GDP per Capita 78 32181 12397 23080 35255 40730 60350

Domestic credit to private sector 78 91.874 32.55 66.804 86.314 111.507 173.325

IV. Method of analysis

This study employs a panel data analysis, as the dataset includes observations across multiple years. The dataset is strongly balanced, with every country having the same number of years to analyse. I begin this section with an introduction to quantile regression.

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allows us to understand how information asymmetries affect countries that are making the most and the least use out of this alternative financing source. In other words, it enables the investigation of whether the relationship between the total equity crowdfunding raised and the explanatory variables differs throughout the distribution of the dependent variable (Koenker & Bassett, 1978). In the case of this study, employing this type of regression is preferable for a number of reasons.

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Figure 3 - The distribution of the total equity crowdfunding amount Overall, in order to obtain results which can be replicable, researchers need to be aware of the different issues associated with each statistical method used. A small sample research could suffers from two major methodological problems (Nikitina et al., 2019): (1) violating the normal distribution assumption and (2) the presence of outliers in the data used. To overcome this issue, a quantile regression method is employed. This analysis tends to be more robust against the existence of outliers (Chernozhukov, Hansen, & Jansson, 2009). Additionally, a bootstrapping method is used. This method can be employed for a small sample analysis (McNeish, 2016: 752) without having to comply with the normality assumption of the error terms (Stuckler, Basu, Suhrcke, Coutts, & McKee, 2009). Briefly, bootstrapping is a resampling method. It allows for the existing data to be repeatedly and randomly resampled, in order to allow for inferences to be made regarding the unknown population (Nikitina & Furuoka, 2018: 422). Thus, bootstrapping albeit not solving the problem of having a small sample it greatly improves the ability of this study to make inferences from the sample to the population. Ultimately, improving the quality of the sample and of the inferences made. On another note, quantile regression for panel data has captured the interest of different scholars (Galvao & Montes-Rojas, 2015: 655), thus its use has been transversal across distinct study areas (e.g., Billger & Goel, 2009; Coad & Rao, 2008). Canto-Cuevas, Palacín-Sánchez, & di Pietro (2016) paper is also noteworthy. They employed a similar approach to study the relationship between trade credit and bank credit, in order to account for the heterogeneity of firms.

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Results

I. Main results

Correlation among the independent variables can pose a problem when interpreting the coefficients that derive from the quantile regression. This is an issue strictly related with data and not the model used (Hair, Black, Babin, Anderson, & Tatham, 2006). The correlation matrix presented in Appendix G indicates the magnitude and direction of the relationships between all the variables employed in this study. Most of the variables did not have a high degree of collinearity, as they do not have values close to the unity. However, the depth of credit information index, strength of legal rights index and new business density showed a high correlation, namely when doing the interaction between them. Thus, for these variables, I mean centered their values and included them in the models. Subsequently, those values were used to calculate the interaction terms. This is done in order to reduce multicollinearity problems, as indicated by Neter, Kutner, Nachtsheim, & Wasserman (1996). Notwithstanding, the lack of high correlation values for certain variables, this does not necessarily guarantee the inexistence of collinearity. One of the conventional measures to assess multicollinearity is the variance inflation factor (VIF). As per the Appendix H, the maximum VIF for the different independent variables is in general below 10 with a mean value of 4.6, which indicates that multicollinearity is not a concern (Neter et al., 1996).

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Table 4 – Determinants of the total amount of equity crowdfunding raised

Q 0.25 Q 0.50 Q 0.75 Q 0.90

Model 1

Inflation -119912.5 72480.7 327742.9 -1025714.6***

(238572.7) (191493.9) (1100017.6) (275852.2)

Domestic credit to private sector 9265.7* _-2746.1** _81178.5 _-88852.9*

(4656.6) (971.1) (63347.4) (35420.4) GDP per Capita 18.45* _-10.46 _49.97 _394.8*** (8.284) (9.929) (66.25) (25.87) GDP 2.970*** _3.300*** _8.746* _2.860** (0.513) (0.262) (3.692) (1.028) GDP growth rate 112826.2 -210832.9*** _507961.4 _-795950.3*** (107626.6) (58988.3) (497254.3) (190325.8) Model 2

Depth of credit information index -604108.3*** _-4166522.2** _-2256184.5*** _-51244429.0

(45750.8) (1289062.6) (247622.1) (94030895.3)

Strength of legal rights index 233954.8*** _985520.6* _-545606.5** _27411439.0

(33364.1) (399433.0) (197124.5) (62407844.8)

Credit registry 119555.2 -3555288.8*** _-3815470.6*** _880392931.7

(226313.4) (914996.0) (1002106.8) (1.86732e+09)

Inflation 288149.9*** _4086539.6** _1434533.5*** _-200075579.6

(75585.6) (1296545.3) (344512.1) (412534245.4)

Domestic credit to private sector -8284.2*** _-90399.1 _-76191.3*** _-4521086.0

(1798.2) (52327.9) (9113.4) (8920428.4) GDP per capita 21.13** _-73.31 _94.23** _-42096.1 (7.246) (46.71) (31.35) (87143.1) GDP 3.991*** _5.133*** _7.361*** _180.0 (0.0610) (0.396) (0.462) (352.0) GDP growth rate -36001.2* _606212.0* _-225996.5*** _10220266.1 (18167.3) (280931.1) (39763.1) (24611669.0) Model 3

Depth of credit information index -285966.6*** _-1061172.0*** _-3255453.2*** _-7264350.8***

(35094.7) (124500.2) (5451.1) (201043.8)

Strength of legal rights index 606988.3*** _568483.7*** _-537982.1*** _-307887.4***

(11311.6) (103468.1) (7349.2) (70452.3)

Credit registry 2887794.0*** _2781370.1*** _-5738214.6*** _-8520239.2***

(81580.4) (290384.6) (46580.7) (465484.5)

New business density 4820269.9*** _5326004.9*** _-3365588.6*** _-7194401.2***

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Inflation 191297.0*** _153564.8 _840429.8*** _697962.9***

(46072.9) (379207.1) (9165.7) (62788.9)

Domestic credit to private sector -13565.4*** _-51074.9*** _-35889.3*** _-52850.7***

(850.0) (9906.3) (232.6) (4032.0) GDP per Capita 5.743* _41.07*** _-1.366** _-88.49*** (2.489) (5.142) (0.492) (4.218) GDP 2.300*** _3.195*** _8.927*** _12.82*** (0.0550) (0.167) (0.0148) (0.183) GDP growth rate 15296.7** _-213636.9*** _-205373.2*** _-238891.6*** (5146.6) (35525.2) (1220.3) (23242.3) D_C_IXB_D -1641490.6*** _-2928059.8*** _2511477.3*** _6567439.3*** (84494.8) (209789.2) (39074.2) (511225.2) S_L_RXB_D -1706273.8*** _-1669503.9*** _339861.2*** _753488.9*** (33823.0) (125111.8) (8941.6) (58685.4) C_RXB_D -5930731.7*** _-4935012.5*** _3977374.9*** _6099987.9*** (129785.3) (440019.0) (59200.3) (259294.4) Observations 78 78 78 78

Note: B_D = New business density; D_C_I = Depth of credit information index; S_L_R = Strength of legal rights index; C_R = Credit registry; X = Interaction between the two variables

Standard errors in parentheses * p < 0.05, ** p < 0.01, *** p < 0.001

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on the debt market, as the literature suggested, but also on the equity crowdfunding raised. Overall, these findings alike the ones in the following models are not only statistically significantly but also economically relevant.

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quantiles (p < 0.001). For these quantiles, the existence of a credit registry leads to a reduction of 3.5 M€ and 3.8 M€ on the equity crowdfunding amount raised, respectively. Lastly, in regard to the control variables, there are some results worth highlighting. Inflation, as opposed to model 1, has a positive impact on the dependent variable and is statistically significant across all quantiles (p < 0.01 or better). As highlighted in the variables section, inflation promotes investment. Thus, the results show that in countries with a higher inflation, there is a preference for equity-based deals. The results of the variable domestic credit to private sector were as expected. In the presence of the information asymmetry variables, the effect of a higher demand for bank credit has a negative impact on the funds raised via equity crowdfunding. This effect is statistically significant (p < 0.001). Lastly, the GDP per capita, GDP and GDP growth rate have similar results to the ones of model 1. Notably, is the fact that GDP growth rate now has a positive effect on the equity crowdfunding amount raised at the median level (p < 0.05), which is consistent with what was expected.

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explanatory power of the model as they all are extremely statistically significant across all quantiles (p < 0.001). Aligned with the Hypothesis developed I will now focus on Q 0.50. The model reveals significant negative interactions between the depth of credit information index and new business density. Thus, higher levels of entrepreneurship amplify the negative effect of the depth of credit information index on the total equity crowdfunding amount raised. Regarding the strength of legal rights index, by its own and when the new business density is equal to 0, its effect on the dependent variable is surprisingly positive (+568K€). However, for higher values of new business density this effect becomes progressively more negative, equating to -1.1M€ (+568K€ - 1.6M€). Similarly, the existence of a credit registry, in this model, also has a positive impact on the equity crowdfunding amount raised. Nevertheless, for higher values of new business density the effect of the existence of a credit registry goes from +2.8M€ to -2.1M€ (+2.8M€ - 4.9M€). Overall, for the average level, the higher the new business density in a given country (i.e., the higher the levels of entrepreneurship), the more negative are the effects of a reduction in information asymmetries on the equity crowdfunding amount raised. Thus, these results are consistent with Hypothesis 3.

II. Robustness tests

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provided by the Doing Business database and captured in the same way as the new business density variable.

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Discussion and conclusion

The residual attention by prior research on the factors that lead to higher amounts of equity crowdfunding being raised by SMEs is unfortunate, considering the prevalent difficulties that SMEs encounter when trying to obtain bank loans (Binks et al., 1992; Jenses & Meckling, 1976). Moreover, information asymmetries are a vital part of banks’ assessment of an SME’s credit worthiness (Deakins & Hussain, 1994: 24). Thus, in theory, with high information asymmetries the expanding equity crowdfunding market can provide a fertile ground for SMEs to obtain financing (Bharath et al., 2009; Myers & Majluf, 1984). Raising some key questions about the measurable role of information asymmetries in helping equity crowdfunding become a valid substitute to bank credit. This study provides novel evidence on this topic, presenting statistically significant and economically meaningful results.

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improvement in the banking information asymmetries will lead to companies returning to banks. If companies progressively familiarize themselves with these equity crowdfunding platforms and obtain the needed funding, why would they feel the need to return to the more traditional financing sources, such as banks? Research at firm-level, could assess the extent to which an individual company’s experience on equity crowdfunding influences their decision. At country-level, in light of the ensuing stricter banking regulations (Binham, 2019; IMF, 2020) information asymmetries can potentially worsen. Thus, further research could explore the extent to which specific laws or legal reforms affect the relationship between equity crowdfunding and bank credit, through the lenses of pecking order and information asymmetry theories. A differences-in-differences approach could be appropriate for such a venture. Such research could prove both timely and pertinent, especially in the EU, where most countries have seen banking regulations remain relatively unchanged, as illustrated by the rather stable depth of credit information and strength of legal rights index values in recent years.

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sample, it would be useful for future research to disentangle the index into the different questions, providing further clarity. Ultimately, this could facilitate further analysis of the consequences of the individual bankruptcy and collateral laws and the way they interact with each other.

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significant obstacle to the growth of this market (Klöhn et al., 2016). This is of the utmost importance for countries with high information asymmetries as firms that cannot obtain bank credit or access an equity crowdfunding platform in their country, may seek other countries’ platforms to fulfil their financing needs. As a result, both the firm and the country where the company is from, become dependent on other countries’ capital flows and naturally their abrupt economical shifts. This is a time sensitive issue given that as of March 2018 platforms can apply for an EU passport which is based on a single set of rules, making it easier for them to offer their services across the EU (European Commission, 2018). Additionally, the results also show a positive correlation between a higher number of companies being set up and the negative effect of information asymmetries on the equity crowdfunding amounts raised, namely in markets with smaller amounts being raised. For this reason, countries with a high business density should place an additional emphasis on fostering the development of equity crowdfunding platforms and their use. The timely significance of such a recommendation is clear, as according to the European Commission (2019a), SMEs in the EU are forecasted to enjoy growing importance in a country’s economy, although likely weakened by the economic implications of COVID-19. Overall, these results aid in understanding how regulation can be either a key driver for or hinderance to SMEs’ growth, if the appropriate alternative financing channels, namely equity crowdfunding, are not in place. This is especially relevant during financial stress periods, in which information asymmetries might be accentuated (Esho & Verhoef, 2018: 15; Paulet, 2018; Sapir & Wolff, 2013).

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Information Asymmetries in Bank Lending, with the Moderating Effect of Entrepreneurship: A Driver of Equity Crowdfunding

Master’s Thesis International Business & Management

June 2020