A Capital User’s Perspective on Crowdfunding Efficiency

Using bid-level data from a large U.S. peer-to-peer lending platform, we document that an average lender has strong herding tendencies: capital flow to a listing increases exponentially as the listing attracts more capital. However, loans funded in explosive bidding auctions do not show superior performance, suggesting that herding does not improve capital allocation efficiency. Rather, herders amplify the effect of random early bidding on the listing's funding success and skew capital allocation in the cross-section of listings. In particular, all else equal, listings started at times of exogenously lower lender activity on the platform are less likely to be funded. In investor heterogeneity analysis, we find that propensity to follow or lead is a persistent investor characteristic and that leaders realize better performance. Overall, this study highlights an important non-fundamental factor of capital allocation in transparent credit markets.