Initial Coin Offerings: Financing Growth with Cryptocurrency Token Sales
with Sabrina Howell and David Yermack
Lead article and Editor's Choice, The Review of Financial Studies, Issue 33 (9) 2020, pp 3925–3974
Initial coin oﬀerings (ICOs) have emerged as a new mechanism for entrepreneurial ﬁnance, with parallels to initial public oﬀerings, venture capital, and pre-sale crowdfunding. In a sample of more than 1,500 ICOs that collectively raise $12.9 billion, we examine which issuer and ICO characteristics predict successful real outcomes (increasing issuer employment and avoiding enterprise failure). Success is associated with disclosure, credible commitment to the project, and quality signals. An instrumental variables analysis ﬁnds that ICO token exchange listing causes higher future employment, indicating that access to token liquidity has important real consequences for the enterprise.
Fake News: Evidence from Financial Markets
with Shimon Kogan and Tobias J. Moskowitz
We examine fake news in financial markets, a laboratory that offers an opportunity to quantify its direct and indirect impact. We study three experimental settings. The first is a unique dataset of unambiguous fake articles on financial news platforms prosecuted by the Securities and Exchange Commission. The second applies a linguistic algorithm to detect deception in expression on the universe of articles on these platforms, using the first sample to validate and calibrate the algorithm. The third is an event study exploiting the SEC investigation as a public shock to investor awareness of fake news. We find that trading activity and price volatility rise with fake news about the firms mentioned in the articles. Following public revelation of the existence of fake news, we find an immediate decrease in reaction to all news, including legitimate news, on these platforms, consistent with indirect spillover effects of fake news conjectured by theory. These findings are predominant among small firms with high retail ownership, and are stronger for more circulated articles. Our results are consistent with economic theory on media bias and its application to fake news.
Strategic Disclosure Timing and Insider Trading
Revision requested at Management Science
I provide evidence that managers strategically manipulate their company’s information environment to extract private benefits. Exploiting an SEC requirement that managers disclose certain material corporate events within five business days, I show that managers systematically disclose negative events when investors are more distracted, causing returns to under-react for approximately three weeks. Strategic disclosure tim- ing is concentrated among smaller firms with high retail-investor ownership and low analyst coverage. Furthermore, I use the fact that most insider sales are scheduled in advance to demonstrate that top managers are more than twice as likely to strategically time disclosures if the return under-reaction benefits their insider sales. Finally, I find that firms that systematically disclose negative news on Fridays have higher levels of earnings management.
Bad News Bearers: The Negative Tilt of Financial Press
with Eric C. So
We show the financial press is more likely to cover firms with deteriorating performance. Our main tests illustrate the nature of the media's story selection process (i.e., what events to cover) and the usefulness of this selection process for forecasting firms' future earnings news and returns. We first show the media is approximately 11-to-19 percent more likely to cover a firm's earnings announcements if they convey poor performance. Similarly, in forecasting tests, greater media coverage predicts subsequently announced declines in firms' profitability and negative analyst-based earnings surprises. A simple long-short strategy betting against firms with high media coverage yields an average return of roughly 40 basis points per month, suggesting media coverage helps forecast future returns because the story selection process is titled toward novel negative events. Together, our findings highlight the usefulness of the media's coverage decisions in estimating expected returns, as well as a potential inference problem when researchers use media coverage to measure the extent of information dissemination and/or whether an information event occurred.