Is There Crowd Wisdom in Accounting? Evidence From Forecasts in Equity-Based Crowdfunding

Abstract

In this article, we study detailed financial forecasts provided by entrepreneurs who seek funds via equity-based crowdfunding on a leading U.K. platform. We investigate (a) what forecast signals investors react to, (b) whether investors can filter out the optimistic bias in forecasts, and (c) whether forecasts are predictive of a venture’s likelihood of survival. We provide strong evidence that entrepreneurs systematically overestimate sales, earnings, profit margin, and assets, and underestimate leverage. Despite the poor forecast quality, investors incorporate forecasted sales, subsequent equity and debt financing, and dividend payments in their investment decisions, but they do not react strongly to other signals. Some evidence suggests that investors are able to detect ex post optimistically biased forecasts among funded projects. However, none of the forecast signals investors react to can predict a higher likelihood of a venture’s survival. Overall, we find mixed evidence regarding crowd wisdom in accounting in the equity-based crowdfunding market.