Keeping it real: How entrepreneurs effectively disclose risk

Abstract

Research SummaryAcross three studies (N = 300, 141, 188), we apply impression management theory to examine if and how entrepreneurs can strategically disclose risk while facilitating beneficial audience perceptions. In the crowdfunding context, we show that intentionally packaging positive information with risk disclosures-a strategy we describe as "compensation"-enhances financing outcomes. Furthermore, we conducted two follow-up randomized experiments (N = 141, 188) to test intervening mechanisms (i.e., perceived authenticity, project quality) and boundary conditions (i.e., information specificity, gender) of the relationship between compensation and crowdfunding performance. Our research has implications for the strategic disclosure of risk, extends our understanding of contextual factors that influence the effectiveness of impression management tactics, and provides guidance for entrepreneurs engaged in crowdfunding efforts.Managerial SummaryShould early-stage entrepreneurs disclose risk to potential investors? In our study, we examine the effects of making the choice to disclose risks associated with a new venture. While risk disclosure may harm financing efforts, we reveal that using a tactic we call "compensation"-in which risk disclosures are packaged with information meant to mitigate the risk-enhances financing efforts for early-stage entrepreneurs by cultivating perceptions of authenticity. Furthermore, we found that the benefit of this tactic appears to be even greater for female entrepreneurs than male entrepreneurs. Overall, our research shows that entrepreneurs should disclose risk, but should take care to do so in a specific manner.