Finance

Epistemology

Psychiatry

Information asymmetry

Issuer

Philosophy

Business

Paleontology

Psychology

Economics

Microeconomics

Cryptocurrency

Venture capital

Entrepreneurial finance

Exaggeration

Context (archaeology)

Quality (philosophy)

Disappointment

Moral hazard

Incentive

Computer security

Computer science

Security token

Monetary economics

Signaling game

Social psychology

Biology

SSRN Electronic Journal

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.

Entrepreneurial Finance and Moral Hazard: Evidence from Token Offerings