Finance

Information asymmetry

Issuer

Business

Exaggeration

Biology

Epistemology

Psychiatry

Philosophy

Paleontology

Cryptocurrency

Psychology

Economics

Microeconomics

Venture capital

Entrepreneurial finance

Quality (philosophy)

Moral hazard

Incentive

Context (archaeology)

Disappointment

Computer science

Security token

Computer security

Social psychology

Journal of Business Venturing

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.

Entrepreneurial Finance and Moral Hazard: Evidence from Token Offerings