A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Blaseg, Daniel; Koetter, Michael Working Paper Friend or Foe? Crowdfunding Versus Credit when Banks are Stressed IWH Discussion Papers, No. 8/2015 Provided in Cooperation with: Halle Institute for Economic Research (IWH) – Member of the Leibniz Association Suggested Citation: Blaseg, Daniel; Koetter, Michael (2015) : Friend or Foe? Crowdfunding Versus Credit when Banks are Stressed, IWH Discussion Papers, No. 8/2015, Leibniz-Institut für Wirtschaftsforschung Halle (IWH), Halle (Saale), http://nbn-resolving.de/urn:nbn:de:gbv:3:2-48571 This Version is available at: http://hdl.handle.net/10419/117342 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. 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Crowdfunding versus Credit when Banks are Stressed Daniel Blaseg Michael Koetter July 2015 No. 8 IWH-DISKUSSIONSPAPIERE IWH DISCUSSION PAPERS IWH _________________________________________________________________ Author(s): Michael Koetter (corresponding author) Halle Institute for Economic Research (IWH) Department of Financial Markets E-mail: [email protected] Frankfurt School of Finance and Management E-mail: [email protected] Phone: +49 69 154 008 446 Daniel Blaseg Goethe-University Frankfurt am Main E-mail: [email protected] The responsibility for discussion papers lies solely with the individual authors. The views expressed herein do not necessarily represent those of the IWH. The papers represent preliminary work and are circulated to encourage discussion with the authors. Citation of the discussion papers should account for their provisional character; a revised version may be available directly from the authors. Comments and suggestions on the methods and results presented are welcome. IWH Discussion Papers are indexed in RePEc-EconPapers and in ECONIS. Editor: Halle Institute for Economic Research (IWH) – Member of the Leibniz Association Address: Kleine Maerkerstrasse 8, D-06108 Halle (Saale), Germany Postal Address: P.O. Box 11 03 61, D-06017 Halle (Saale), Germany Phone: +49 345 7753 60 Fax: +49 345 7753 820 Internet: www.iwh-halle.de ISSN 1860-5303 (Print) ISSN 2194-2188 (Online) II IWH Discussion Papers No. 8/2015 _________________________________________________________________ IWH Friend or Foe? Crowdfunding versus Credit when Banks are Stressed* Abstract Does bank instability push borrowers to use crowdfunding as a source of external fi- nance? We identify stressed banks and link them to a unique, manually constructed sample of 157 new ventures seeking equity crowdfunding. The sample comprises pro- jects from all German equity crowdfunding platforms since 2011, which we compare with 200 ventures that do not use crowdfunding. Crowdfunding is significantly more likely for new ventures that interact with stressed banks. Innovative funding is thus par- ticularly relevant when conventional financiers are facing crises. But crowdfunded ventures are generally also more opaque and risky than new ventures that do not use crowdfunding. Keywords: equity crowdfunding, credit crunch, bank stress JEL Classification: G01, G21, G30 * We are grateful for feedback received from the P2P Financial Systems Bundesbank/SAFE/UCL conference and seminars at Goethe University. Comments from our discussant Karsten Wenzla and other seminar participants are gratefully acknowledged. We thank in particular Christoph Siemroth, Bernd Skiera, and Adalbert Winkler for their detailed feedback. All errors are our own. IWH Discussion Papers No. 8/2015 III 1 Introduction Akerlof's (1970) seminal lemons problem epitomizes the key challenge faced by any investor: how to select projects from a pool of opaque applicants. Tra- ditionally, banks help resolve the information asymmetry between savers and investors by developing screening competences and acting as delegated moni- tors (Diamond, 1984). But dramatically reduced transaction and information acquisition costs, together with historically low interest rates, impede banks' incentives to engage in costly information generation, which can lead to the contraction of credit (Puri et al., 2011; Jim´enezet al., 2012) or misallocated funding to too risky projects (Dell'Ariccia and Marquez, 2004; Jim´enezet al., 2014). Against this backdrop, recent studies by Belleflamme et al. (2013) and Mollick (2014) hypothesize that crowdfunding may rival bank finance and con- nect even small savers with risky new ventures that face traditionally tighter financing constraints (e.g., Cassar, 2004; Robb and Robinson, 2014). We test whether the wisdom-of-the-(investor)crowd can substitute for bank credit as a major source of funding for new ventures, by exploiting exogenous shocks to young ventures' banks. We construct a novel, hand-collected data set of ventures' uses of equity crowdfunding in Germany, their relationships with banks, and various venture traits since 2011. By observing venture-bank relationships, we can identify if ventures connected to shocked banks are more likely to use crowdfunding in an attempt to substitute for contracting bank credit supply. In so doing, we move beyond the admittedly important de- scriptive evidence in this nascent strand of literature, which does not permit inferences about the causal effects of the determinants of crowdfunding. 1 1 Recent policy (e.g., De Buysere et al., 2014), and academic (e.g., Mollick, 2014; 1 We also control for observable management and venture traits to determine if more opaque ventures with greater information asymmetries are more likely to use crowdfunding as an alternative source of financing. Greater information asymmetries increase capital costs, which implies a well-known pecking order of capital structure: Internal funds are preferred over debt, and equity is a last resort of funding (Jensen and Meckling, 1976; Myers and Majluf, 1984). To mitigate information asymmetries and facilitate the efficient allocation of fi- nancial resources, from savers to productive investors, financial intermediaries can generate private information by establishing close and long-term relation- ships (Rajan, 1992; Uchida et al., 2012). But relationship lending is costly, so banks may turn down funding requests by promising, yet hard-to-assess projects such as new ventures if they cannot confidently cover the costs asso- ciated with producing necessary private information (Rajan, 1992; Petersen and Rajan, 1994, 2002). In this setting, we investigate if ventures tied to banks that struggle to cover the costs of private information generation are more likely to tap a potentially less-than-wise crowd as a funding source. The financial crisis of 2008 amplified the generally prevalent challenges that young and small ventures confront when trying to raise external finance. In the aftermath of the great financial crisis, the number and volume of equity financ- ing rounds from venture capital sources declined significantly (Block et al., 2010), credit supply tightened in the Eurozone (Hempell and Kok, 2010), and in Germany, even local lenders reduced their loans (Puri et al., 2011). Gorman and Sahlman (1989) and Cassar (2004) caution that credit supply Schwienbacher, 2013; Hornuf and Schwienbacher, 2014) light on the potential role of crowdfunding and vividly illustrate the broadening interest in this new form of financing ventures. We instead seek to provide empirical evidence about the causal effects of bank credit crunches. 2 shocks are especially important for new ventures. However, most existing em- pirical evidence is geared toward venture capitalist funding (for an overview, see Gompers and Lerner, 2001). The ability of crowdfunding to substitute for bank credit or other sources of external finance, due to its significantly lower transaction costs in the Internet age, in particular remains unclear. This research gap exists primarily because of the absence of data. We hand- collected a sample of all the ventures that applied for funds on major German equity crowdfunding platforms since 2011. That is, among 357 new ventures for which we have data, 157 applied for equity crowdfunding at one of the six major German online platforms between November 2011 and June 2014, which cover 95% of the total market in terms of offerings and 99% in terms of volume. Figure 1 illustrates the structure of the sample and the main specifications that explain the odds that a venture apply for external funding on a crowdfunding platform conditional on its bank relationship and venture