The Financial and Non-Financial Performance of Token-Based Crowdfunding: Certification Arbitrage, Investor Choice, and the Optimal Timing of ICOs

61 Pages Posted: 28 Apr 2023

See all articles by Niclas Dombrowski

Niclas Dombrowski

University of Hamburg

Wolfgang Drobetz

University of Hamburg

Lars Hornuf

Technische Universität Dresden; CESifo (Center for Economic Studies and Ifo Institute)

Paul P. Momtaz

Technische Universität München (TUM) - TUM School of Management; University College London Center for Blockchain Technologies; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 2023

Abstract

What role does the selection of an investor and the timing of financing play in initial coin offerings (ICOs)? We investigate the operating and financial performance of ventures conducting ICOs with different types of investors at different points in the ventures’ life cycle. We find that, relative to purely crowdfunded ICO ventures, institutional investor-backed ICO ventures exhibit poorer operating performance and fail earlier. However, conditional on their survival, these ventures financially outperform those that do not receive institutional investor support. The diverging effects of investor backing on financial and operating performance are consistent with our theory of certification arbitrage; i.e., institutional investors use their reputation to drive up valuations and quickly exit the venture post-ICO. Our findings further indicate that there is an inverted U-shaped relationship for fundraising success of ICO ventures over their life cycle. Another inverted U-shaped relationship exists for the short-term financial performance of ICO ventures over their life cycle. Both the fundraising success and the financial performance of an ICO venture initially increase over the life cycle and eventually decrease after the product piloting stage.

Keywords: Token Offering, Initial Coin Offering (ICO), crypto funds, operating versus financial performance, entrepreneurial finance, optimal timing

JEL Classification: G240, G320, K220, L260

Suggested Citation

Dombrowski, Niclas and Drobetz, Wolfgang and Hornuf, Lars and Momtaz, Paul P., The Financial and Non-Financial Performance of Token-Based Crowdfunding: Certification Arbitrage, Investor Choice, and the Optimal Timing of ICOs (2023). CESifo Working Paper No. 10393, Available at SSRN: https://ssrn.com/abstract=4431384 or http://dx.doi.org/10.2139/ssrn.4431384

Niclas Dombrowski

University of Hamburg ( email )

Hamburg

Wolfgang Drobetz

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Lars Hornuf

Technische Universität Dresden ( email )

Dresden, 01307
Germany

HOME PAGE: http://www.hornuf.com

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Paul P. Momtaz (Contact Author)

Technische Universität München (TUM) - TUM School of Management ( email )

Arcisstr. 21
Munich, 80333
Germany

University College London Center for Blockchain Technologies ( email )

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

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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