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Entrepreneurial Finance and Moral Hazard: Evidence from Token Offerings

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  • Momtaz, Paul P.

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.

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  • Momtaz, Paul P., 2021. "Entrepreneurial Finance and Moral Hazard: Evidence from Token Offerings," Journal of Business Venturing, Elsevier, vol. 36(5).
  • Handle: RePEc:eee:jbvent:v:36:y:2021:i:5:s0883902619301867
    DOI: 10.1016/j.jbusvent.2020.106001
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    More about this item

    Keywords

    Token offering; Token sale; Initial coin offering (ICO); Signaling; Moral hazard; Crowdfunding; Blockchain; Cryptocurrencies;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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