It’s tempting to reveal very little information when trying to make a sale. We all want to put our best foot forward, and to reveal imperfections only when we absolutely have to. For example, when selling a car, a seller might want to reveal the car’s age and mileage, but be reluctant to reveal other imperfections, such as dings in the paintwork.
However, a study on information disclosure shows that more disclosure, even of defects, can result in higher prices. The study randomly split 8,000 cars into two groups – one with standard information, including age and mileage, and a second group with additional detailed information on the car’s paintwork. The results showed that the group with more detailed information had a better chance of sale, and sold for higher prices. Most surprisingly, this effect was greatest for cars in poorer condition. The probability of a sale rose by 23%, with prices up by 5%. The additional information helped buyers better evaluate their purchase, leading to increased prices.
Another study from UC Davis found that voluntary disclosure of greenhouse gas emissions resulted in a rise in the company's stock value. Similar companies that did not disclose their greenhouse gas emissions did not see a significant change in stock price in the same time period. Importantly, smaller companies disclosing this information saw a greater increase in stock values. The authors believe the reason is probably because investors know less about these companies so the release of additional information that addresses uncertainty has a more pronounced effect.
A study on the Economic Consequences of Increased Disclosure found that the increased disclosure provided by non-US companies when they listed on a US stock exchange had economically significant consequences. The increase is particularly noticeable for companies from countries with weaker disclosure requirements. It shows that more information provided leads to better pricing, and lack of information creates uncertainty for the investor and imposes a discount.
The “uncertainty discount” reflected in these studies is a well-known phenomenon and it applies to many assets (cars, companies). How is it relevant to crowdfunding?
The studies suggest that providing the investor with more information leads to a better price. In each of these studies, the effect of more voluntary disclosure had the greatest impact when the disclosing company was unfamiliar to the buyer, just as many start-ups will be to potential crowdfunding investors. That’s where CrowdCheck comes in. We talk to entrepreneurs to get the information that investors value, and help them present that disclosure in a thorough and user-friendly way. The information provided helps to reduce the uncertainty that investors may feel with respect to an unfamiliar company, which improves the chances that the entrepreneur will get the desired valuation for his or her company, a win for everyone.