The Role of Disclosure Content and Tone in an Unregulated Market—Evidence from Initial Coin Offerings

• In Event: Effect of Language and Culture

Abstract

This study investigates the role of voluntary disclosure in a completely unregulated capital market. We focus on Initial Coin Offerings (ICOs), in which start-ups and projects raise funds by issuing their own cryptocurrencies, so-called tokens. In contrast to prior research, this setting allows to examine an unregulated capital market in which both professional and non-professional investors participate. Based on unregulated and unaudited information disclosed in whitepapers, ICOs have been raising USD 19.4 billion until June 2018. We investigate the impact of disclosure content and tone in ICO whitepapers on the underpricing of the respective tokens. Using a hand-collected sample of 206 ICOs, we find that more disclosure content as well as a more conservative tone decreases underpricing. Further analyses show that the findings are driven by disclosure on the financial characteristics of an ICO. We also document that disclosure length is positively related to underpricing, suggesting an information overload resulting from longer whitepapers.

Author

• Stephan Romeike, Technical University of Munich