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 in Financial Markets
with Shimon Kogan and Tobias J. Moskowitz
We study fake news in financial markets using a novel dataset from an undercover SEC investigation. Our setting measures both the direct and indirect effects of market manipulation. Fake articles directly induce abnormal trading activity and increase price volatility, but in addition, the awareness of fake news from the SEC investigation indirectly affects legitimate articles, causing market participants to discount all news from these platforms. These spillover consequences significantly reduce the social network’s impact on information dissemination, trading, and prices. The results are particularly acute among small firms with high retail ownership and for the most circulated articles. The equilibrium response of consumers and producers of news on these networks is consistent with models of trust, providing novel evidence on the importance of social capital for financial activity.
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.