Entrepreneurial Finance and Moral Hazard: Evidence from Token Offerings

Paul P. Momtaz

Journal of Business Venturing, 2021, vol. 36, issue 5

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.

Keywords: Token offering; Token sale; Initial coin offering (ICO); Signaling; Moral hazard; Crowdfunding; Blockchain; Cryptocurrencies (search for similar items in EconPapers)
JEL-codes: G14 G30 L26 M13 O16 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbvent:v:36:y:2021:i:5:s0883902619301867

DOI: 10.1016/j.jbusvent.2020.106001

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