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.
•This paper studies Initial Coin Offerings (ICOs) to provide the first-ever evidence of a moral hazard in signaling in this entrepreneurial finance context.•The empirical findings suggest that token issuers systematically exaggerate information disclosed in whitepapers.•Exaggerating entrepreneurs raise more funds in less time.•However, exaggerating signals backfires as soon as investors learn about the bias through trading with other investors.
Sustainability orientation has a positive effect on startups' initial valuation and a negative effect on their post-funding financial performance. All else equal, improving sustainability orientation ...by one standard deviation increases startups' funding amount by 28 % and decreases investors' abnormal returns per post-funding year by 16 %. The results hold in a large sample of blockchain-based crowdfunding campaigns, also known as Initial Coin Offerings (ICOs) or token offerings. A key contribution is a machine-learning approach to assess startups' Environment, Society and Governance (ESG) properties from textual data, which we make readily available at www.SustainableEntrepreneurship.org.
•The paper examines the economic attractiveness of Sustainable Entrepreneurship (SE) for entrepreneurs and investors in the context of Initial Coin Offerings (ICOs).•Startups with salient Environment, Society and Governance (ESG) goals raise financing at higher valuations.•However, startups with salient ESG goals underperform post-funding.•Overall, high valuations incentivize entrepreneurs to adopt ESG goals in the first place, while investors incur a relative financial loss for backing SE.•Our machine-learning approach to quantify startups' ESG properties from text data is available via an easy-to-use web application: https://sustainableentrepreneurship.org/
We analyze the interaction between a firm's product market advertising and its corporate financing decisions. We consider a firm that faces asymmetric information in both the product and financial ...markets and that needs to raise external financing to fund its growth opportunity (new project). Any product market advertising undertaken by the firm is visible to the financial market as well. In equilibrium, the firm uses a combination of product market advertising, equity underpricing, and underfinancing (raising a smaller amount of external capital than the full information optimum) to convey its true product quality and the intrinsic value of its projects to consumers and investors. The following two predictions arise from our theoretical analysis for the relation between product market advertising and equity underpricing around new equity issues. First, firms choose a higher level of product market advertising when they are planning to issue new equity, compared with situations in which they have no immediate plans to do so. Second, product market advertising and equity underpricing are substitutes for a firm issuing new equity. We empirically test the above two predictions and find supporting evidence in the context of firms making initial public offerings and seasoned equity offerings.
As Initial Public Offering (IPO) is a significant milestone in the financial strategy of a firm, this study aims to evaluate performance of IPOs using multiple measures including accounting-based ...performance (ABP), value-based performance (VBP) and overall performance (OP) in the pre-and post-IPO periods. Therefore, we present two combined approaches based on a compromise MCDM method-VIKOR and objective weighting methods-CRITIC and MW (Mean Weight) to evaluate and rank IPOs to help shareholders with understanding on how their performance changes under the different measures. Since the compromise solution (one or a set) proposed by VIKOR depends substantially on criteria weights, VIKOR-CRITIC can show more realistic results because of the differential weights assigned to criteria by CRITIC. In this study, a case study is conducted in order to evaluate the performance of Turkish IPOs based on ABP, VBP and OP measures using the combined methods. The results show that the compromise solution results obtained by VIKOR-CRITIC may be a guideline for investors in making more profitable investment decisions before leaping into any investment decision.
Blockchain is a ground-breaking technology with potential applications in fundraising. In this study, we analyze the blockchain-based fundraising data from 2019 to 2021 to investigate the differences ...between various fundraising models (i.e., ICO, IEO, IDO, and MIX). More specifically, in Study 1, we conduct ANCOVA and ANOVA to examine differences in fundraising success and token performance after listing between different fundraising models. In Study 2, we first explore the factors that affect fundraising success and token performance, and then verify whether the impact of these factors varies between fundraising models. The findings of our research have implications for both firms and investors, assisting firms in selecting the most effective fundraising models and aiding investors in identifying tokens with the greatest potential.
•Different fundraising models differ in fundraising success and token performance.•Factors affecting fundraising success and token performance vary across models.•Initial DEX Offerings (IDOs) have fast liquidity in the short term.•Initial Exchange Offerings (IEOs) perform better in the long term.•Initial Coin Offerings (ICOs) have no clear advantages compared to other models.
This article investigates stock market responses to different constellations of firm-level corporate governance mechanisms by focusing on foreign initial public offerings (IPOs) in the United States. ...We build on sociology-grounded research on financial market behavior and use a "nested" legitimacy framework to explore US investor perceptions of foreign IPO value. Using a fuzzy set theoretic methodology, we demonstrate how different combinations of monitoring and incentive-based corporate governance mechanisms lead to the same level of investor valuation of firms. Moreover, institutional factors related to the strength of minority shareholder protection in a foreign IPO's home country represent a boundary condition that affects the number of governance mechanisms required to achieve high value perceptions among US investors. Our findings contribute to the sociological perspective on comparative corporate governance and the dependencies between organizations and institutions.
This paper investigates the effects of going public on innovation by comparing the innovation activity of firms that go public with firms that withdraw their initial public offering (IPO) filing and ...remain private. NASDAQ fluctuations during the bookbuilding phase are used as an instrument for IPO completion. Using patent-based metrics, I find that the quality of internal innovation declines following the IPO, and firms experience both an exodus of skilled inventors and a decline in the productivity of the remaining inventors. However, public firms attract new human capital and acquire external innovation. The analysis reveals that going public changes firms' strategies in pursuing innovation.
I propose a new measure of venture capital (VC) firm reputation and analyze its performance implications on private companies. Controlling for portfolio company quality and other VC-specific factors ...including experience, connectedness, syndication, industry competition, exit conditions, and investment environment, I find companies backed by more reputable VCs by
initial public offering (IPO) capitalization share (based on cumulative market capitalization of IPOs backed by the VC), are more likely to exit successfully, access public markets faster, and have higher asset productivity at IPOs. Further tests suggest VCs’ IPO Capitalization share effectively captures both VC screening and monitoring expertise. My findings have financial implications for limited partners and entrepreneurs regarding their VC-sorting activities.
We present a new approach for content analysis to quantify document tone. We find a significant relation between our measure of the tone of 10-Ks and market reaction for both negative and positive ...words. We also find that the appropriate choice of term weighting in content analysis is at least as important as, and perhaps more important than, a complete and accurate compilation of the word list. Furthermore, we show that our approach circumvents the need to subjectively partition words into positive and negative word lists. Our approach reliably quantifies the tone of IPO prospectuses as well, and we find that the document score is negatively related to IPO underpricing.
Flotation costs represent a significant loss of capital to firms and are positively related to information asymmetry between managers and outside investors. We measure a firm's information asymmetry ...by its accounting information quality based on two extensions of the Dechow and Dichev 2002. The quality of accruals and earnings: the role of accrual estimation errors. Accounting Review 77, 35–59 earnings accruals model, which is a more direct approach to assessing the information available to outside investors than the more commonly used proxies. Our main hypothesis is that poor accounting information quality raises uncertainty about a firm's financial condition for outside investors, though not necessarily for insiders. This accounting effect lowers demand for a firm's new equity, thereby raising underwriting costs and risk. Using a large sample of seasoned equity offerings (SEOs), we show that poor accounting information quality is associated with higher flotation costs in terms of larger underwriting fees, larger negative SEO announcement effects, and a higher probability of SEO withdrawals. These results are robust to joint determination of offer size and flotation cost components and to adjustments for sample selection bias.
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