De-Crypto-ing Signals in Initial Coin Offerings: Evidence of Rational Token Retention

Abstract

Using the market for initial coin offerings (ICOs) as a laboratory, we provide evidence that entrepreneurs use retention to alleviate information asymmetry. The underlying technology and the absence of regulation make the ICO market well suited to study this question empirically. Using a hand-collected data set, we show that ICO issuers that retain a larger fraction of their tokens are more successful in their funding efforts and are more likely to develop a working product. Moreover, we find that retention is a stronger signal when markets are crowded, and investors do not have as much time to conduct due diligence. This paper was accepted by Will Cong, Special Issue of Management Science: Blockchains and crypto economics. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.4631 .

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

“…The result is a separating equilibrium, which may resolve the problem of asymmetric information in startup equity financing. The concept has been applied to venture capital (Busenitz et al, 2005), equity crowdfunding (Ahlers et al, 2015;Vismara, 2016), and token offerings (Davydiuk et al, 2023;Fisch, 2019). However, the applicability of signaling is controversial in token offerings, inter alia, because most signals in token offerings are not costly but rather considered "cheap talk" (Bourveau et al, 2022) and, in the absence of regulation, often are exaggerated and not enforceable (Momtaz, 2021c).…”