CUHK Business School Research Finds Crowdfunding a Democratising Force in Financing, But Benefited Those with Lower Income and Education Less

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HONG KONG, CHINA – Media OutReach
– 30 July 2020 – Crowdfunding, which has seen its popularity skyrocket with the rise of high profile platforms the likes
of Kickstarter, GoFundMe and IndieGoGo, has often been hailed as a “democratising
force” in finance, allowing enterprising individuals to launch new and
innovative ventures while bypassing traditional sources of funding they would
otherwise be unable to access. In a recent report, the global crowdfunding
market was valued at US$10.2 billion in 2018 and was forecast to almost triple
by 2025. Clearly, crowdfunding has hit mainstream, but has it lived up to its
promise to give entrepreneurs of all stripes and sorts easier access to
capital?

 

According to a
new research study conducted at The Chinese University of Hong Kong (CUHK),
entitled Crowdfunding and the Democratization of Access to Capital —
An Illusion? Evidence from Housing Prices
, the answer is a qualified yes.

 

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Conducted by Keongtae Kim, Assistant Professor in the Department of Decision Sciences
and Managerial Economics at CUHK Business School; and Prof. Il-Horn Hann at the
University of Maryland, the study analysed the track record of crowdfunding and
found evidence that pointed to its potential to level the fundraising playing
field for entrepreneurs. However, this result came crouched in an important
caveat — it found that people who lived in areas with lower levels of income
and education were less able to take advantage of it to launch projects.

 

The study arrived
at this conclusion by focusing on one of the most important types of credit for
entrepreneurs — bank financing through housing collateral, looking at how
accessibility to these loans related to crowdfunding by entrepreneurs. Prior
studies had already shown that housing wealth can ease credit constraints for
entrepreneurs, making it a primary factor in financing new ventures.

 

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The researchers
obtained data on housing prices and matched this with a data set from
crowdfunding platform Kickstarter. They focused on local housing prices as a
proxy for collateral-based credit availability for entrepreneurs in a local
market. If entrepreneurs living in areas with declining housing prices have an
increasing degree of difficulty in raising sufficient capital, they may be
inclined to use crowdfunding as an additional funding source.

 

The professors
focused on technology-based projects in the technology and games categories,
obtaining data covering April 2009 through December 2013 and accounting for
9,120 projects that attracted more than US$257 million in pledges from
approximately 3.4 million contributors.

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Impact of Housing Prices

“We found
that tightened credit constraints imposed because of declines in local housing
prices led to increased use of crowdfunding. This finding supported the idea
that crowdfunding serves as a supplement to traditional sources of financing,”
says Prof. Kim.

 

“We also observed
that a decline in housing prices led to even more people turning to
crowdfunding in areas with a large share of homeowners and in states with
unlimited homestead exemptions,” he adds. Homestead exemptions are legal
provisions that shield homeowners from partial or full seizure of their
properties in the event of a default, and previous studies have shown that
banks are less willing to lend to individuals in states with high or even
unlimited homestead exemptions.

 

“Our
research indicated that crowdfunding can serve as an addition to traditional
financial sources, implying that online crowdfunding has the potential to
democratize access to finance in the sense that it can be an option for
entrepreneurs who have difficulty accessing traditional funding,” Prof.
Kim says.

 

The researchers
did not find a link between a fall in housing prices and whether a crowdfunding
project was successful or not.

 

However, they
also found a stark contrast in the ability to access capital using crowdfunding
between the wealthier and the poor. Specifically, they observed that a decrease
in housing prices led to an increase in successful crowdfunding projects
primarily for areas in high socio-economic status and an increase in
unsuccessful projects primarily for areas of low socio-economic status.

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“Although
entrepreneurs from areas of low socio-economic conditions have at least equal
access to online crowdfunding, they may still suffer from lower demand for
their projects. This may be partly because of less support of their social
networks,” Prof. Kim says.

 

“The role of
access to financing is essential as difficult access discourages
entrepreneurship, as measured by self-employment surveys and census data, and
entrepreneurship is very important,” he adds.

 

In the U.S. alone,
small businesses employ more than 50% of the private sector workforce and
account for 66% of all net job creation. Most jobs are created by young,
typically small businesses. High-growth start-ups contribute significantly to
job creation in the U.S. economy.

 

Leveling the Crowdfunding Playing Field

Crowdfunding has
the potential to offset a decrease in entrepreneurship. “However,
entrepreneurs need to be strategic in seeking funding from sources that may be
favourable to them,” cautions Prof. Kim

 

The study showed
that while decreasing housing prices made banks reduce credit supply to
entrepreneurs in need, crowdfunders were still willing to back them. “Entrepreneurs
living in disadvantaged areas should exploit crowdfunding aggressively and
attempt to build upon their social networks or improve their projects for
successful funding,” he says.

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“To help
entrepreneurs from disadvantaged areas in achieving real economic benefits from
crowdfunding, we must understand its underlying mechanisms,” says Prof.
Kim.

He advises that
policymakers should seek to implement policies to help entrepreneurs from areas
of low socio-economic status to obtain sufficient resources to raise money from
online crowdfunding successfully.

 

A shortfall of
their research, he concedes, was that though their ad hoc analysis suggests
that social networks play a considerable role in the socio-economic divide,
they could not explore this in a meaningful way due to data limitation.

 

According to the
professor, another limitation was that their study focused only on
technology-intensive projects, meaning that they have a limited ability to
discuss crowdfunding in other types of projects.

 

“Although we
recognise that bank financing and crowdfunding offer different funding
conditions in terms of funding duration, success rates of funding, interest
charges, and so on, the two channels considerably overlap,” concludes
Prof. Kim, adding that a significant number of creators are potentially able to
use both channels and choose the optimal combination that offers the best terms
and conditions.

 

Reference:

Keongtae Kim,
Il-Horn Hann (2019) Crowdfunding and the Democratization of Access to Capital —
An Illusion? Evidence from Housing Prices. Information Systems Research
30(1):276-290. https://doi.org/10.1287/isre.2018.0802

 

This article was first published in
the China Business Knowledge (CBK) website by CUHK Business School: https://bit.ly/3hcehWv.

About CUHK Business School

CUHK Business School comprises two schools — Accountancy
and Hotel and Tourism Management — and four departments —
Decision Sciences and Managerial Economics,
Finance, Management and Marketing. Established in Hong
Kong in 1963, it is the first business school to offer BBA, MBA and Executive
MBA programmes in the region. Today, the School
offers 11 undergraduate programmes and 20
graduate programmes including MBA, EMBA,
Master, MSc, MPhil and Ph.D.

 

In the Financial Times Global
MBA Ranking 2020, CUHK MBA
is ranked 50th. In FT‘s
2019 EMBA ranking, CUHK EMBA is
ranked 24th in the world. CUHK Business School has the largest
number of business alumni (37,000+) among
universities/business schools in Hong Kong — many of
whom are key business leaders. The School currently has about
4,800 undergraduate and postgraduate students and Professor Lin Zhou is the Dean of
CUHK Business School.

 

More information is available at http://www.bschool.cuhk.edu.hk or by connecting with CUHK Business School
on:

Facebook: www.facebook.com/cuhkbschool

Instagram: www.instagram.com/cuhkbusinessschool

LinkedIn: http://www.linkedin.com/school/cuhkbusinessschool

WeChat: CUHKBusinessSchool

CUHK Business School Research Finds Crowdfunding a Democratising Force in Financing, But Benefited Those with Lower Income and Education Less

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CUHK Business School Research Finds Crowdfunding a Democratising Force in Financing, But Benefited Those with Lower Income and Education Less - Brand SpurCUHK Business School Research Finds Crowdfunding a Democratising Force in Financing, But Benefited Those with Lower Income and Education Less - Brand Spur

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