Abstract

Crowdfunding is a means of raising funds directly from individuals and avoiding traditional capital providers such as professional investors (Howe, 2008). The Internet has led to the proliferation of crowdfunding on a worldwide basis. In April 2012, President Obama signed the Jumpstart Our Business Startups (“JOBS”) Act, which elevated crowdfunding to equity markets in the U.S. Many small business advocates see this Act as a boon to entrepreneurial activity by opening previously inaccessible capital channels. While there is reason to be optimistic about the JOBS Act, there is also reason for concern. Herding behavior occurs when individuals converge in a particular behavior (Bikhchandani, Hirshleifer & Welch, 1998). In this study, we invoke social psychological theories to develop a framework to explicate herding behaviors in a crowdfunding context. Drawing on conformity and regulatory focus theories, we propose that individuals will respond differently to favorable and unfavorable social information, depending on their underlying prevention or promotion focus.

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