De-crypto-ing Signals in Initial Coin Offerings: Evidence of Rational Token Retention
55 Pages Posted: 6 Dec 2018 Last revised: 2 May 2019
Date Written: October 31, 2018
Using the market for initial coin offerings (ICOs) as a laboratory, we provide evidence that entrepreneurs use retention to signal their quality to investors in the presence of asymmetric information. ICO investors face a high degree of uncertainty because of the unregulated and opaque nature of the ICO market. Using a detailed dataset on 7,450 ICOs, we show that ICOs that retain a larger fraction of their tokens are more successful in their funding efforts. We implement an instrumental variables strategy and estimate that a 1 p.p. increase in token retention leads to a 1.4 p.p. increase in fundraising success. Moreover, we find that signaling incentives are stronger in periods of elevated market noise.
Keywords: asymmetric information, signaling, entrepreneurial financing, ICOs
JEL Classification: D82, G32, L26
Suggested Citation: Suggested Citation