Entrepreneurial Finance and Moral Hazard: Evidence from Token Offerings

53 Pages Posted: 4 Apr 2019 Last revised: 8 Jun 2020

See all articles by Paul P. Momtaz

Paul P. Momtaz

University of California, Los Angeles (UCLA) - Anderson School of Management; University College London Center for Blockchain Technologies

Date Written: January 29, 2020

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 verifying endogenous signals may induce a moral hazard in signaling. Consistent with this hypothesis, an 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

JEL Classification: G14, G30, L26, M13, O16

Suggested Citation

Momtaz, Paul P., Entrepreneurial Finance and Moral Hazard: Evidence from Token Offerings (January 29, 2020). Journal of Business Venturing, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3343912 or http://dx.doi.org/10.2139/ssrn.3343912

Paul P. Momtaz (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

University College London Center for Blockchain Technologies ( email )

UCL CBT UCL Computer Science
Malet Place London WC
London, London
United Kingdom

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