Entrepreneurial Finance and Moral Hazard: Evidence from Token Offerings
By Paul P. Momtaz. Social Science Research Network, 2020
173 citations recorded by the source corpus.
Abstract This paper provides the first evidence of a moral hazard in signaling in an entrepreneurial finance context, by examining token offerings or Initial Coin Offerings (ICOs). Entrepreneurs' ability to signal quality is crucial to succeeding in the competition for growth capital. However, the absence of institutions that verify endogenous signals may induce a moral hazard in signaling. Consistent with this hypothesis, artificial linguistic intelligence indicates that token issuers systematically exaggerate information disclosed in whitepapers. Exaggerating entrepreneurs raise more funds in less time, suggesting that investors do not see through this practice initially. Eventually, the crowd learns about the exaggeration bias through trading with other investors. The resulting investor disappointment causes the cryptocurrency to depreciate and the probability of platform failure to increase.
Subfields: Accounting, Management Information Systems
View Paper: https://www.semanticscholar.org/paper/0725e77ca9368de7867495ee6c8ca303cf2efa98
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Citations in the corpus
- Initial Coin Offerings: Financing Growth with Cryptocurrency Token Sales (2018, unknown): “…Giudici and Martinazzi (2018), An et al. (2018), Ante et al. (2018), Blaseg (2018), Burns and Moro (2018), Feng et al. (2018), Fenu et al. (2018), Fisch (2018), Guske and Bendig (2018), Johnson and Yi (2019), Lee et al. (2018), Momtaz (2018a), Momtaz (2018c), Rhue (2018b), and An et al. (2018).”
- Institutional investors and post-ICO performance: an empirical analysis of investor returns in initial coin offerings (ICOs) (2020, unknown): “An initial coin offering (ICO) (i.e., token offering) is a novel mechanism of entrepreneurial finance that enables ventures to raise capital by selling tokens to a crowd of investors (e.g., Fisch, 2019; Howell et al., 2019; Momtaz, 2020a).”
- A systematic literature review on SME financing: Trends and future directions (2021, background): “There is also the usage of signaling theory, which can be used to analyze the differences between high- and low-quality firms based on their communication to their lenders, which can help to reduce information asymmetry (Momtaz, 2020).”