Entrepreneurs routinely present over-inflated growth forecasts when seeking funding. While these inflated projections are often attributed to behavioral reasons (entrepreneurs’ overoptimism), we argue that another significant contributor are economically rational reasons (strategic exaggeration). We theorize that entrepreneurs calibrate their level of exaggeration based on economic incentives. Using proprietary data on 1,089 business angel pitches and 319 equity crowdfunding campaigns, we show that the degree of exaggeration varies with entrepreneurs’ economic incentives to exaggerate. Exaggeration is more pronounced when the costs of exaggeration are lower, the benefits are higher, and the necessity to exaggerate is stronger. We use various approaches, including analyzing a subsample of ventures that pitched in both settings and a natural experiment that targeted forecast inflation in one setting but not the other, to verify the robustness of the results. The findings have implications for investors who evaluate entrepreneurial investment opportunities.
