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| The Study of Initial Coin Offerings: From the Perspective of Firm Lifespan |
| PAN Yue, XIE Yuxiang, PAN Jianping
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| School of Economics/WISE, Xiamen University;School of Economics and Management, Southeast University |
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Abstract An initial coin offering (ICO) is a novel way for start-ups to fund projects by issuing blockchain-based tokens via the Internet. ICOs can provide an influx of external capital more quickly than traditional equity financing. By bringing more individual investors into funding start-ups, ICOs also change the funding landscape: previously, the equity financing market was ruled by institutional investors such as venture capital (VC)investors and private equity (PE) investors. ICOs are thus considered a revolution disrupting traditional sources of venture capital.
Theoretically, the tokens issued by ICOs can be regarded as special securities that offer the right to receive income in the absence of voting power. Thus, ICOs may have diametrically opposed effects on firms. On the one hand, an ICO will increase the separation of ownership and control, which gives the actual controllers a tunneling incentive. Moreover, ICO investors cannot provide intensive monitoring services like venture capitalists, so opportunistic behaviors by management are loosely constrained. In addition, the large number of ICO investors scattered around the world are more likely to enjoy benefits as free riders rather than actively providing firms with better access to scarce resources; this would negatively affect the development of start-ups and significantly shorten their lifespan.ICOs also have advantages that help firms to increase their lifespan. First, an ICO is a fast track for raising money, so start-ups can quickly invest in valuable projects and seize market opportunities. Second, ICO investors can use the tokens to purchase start-ups' future products and services; in this way, firms can establish their consumer base at an early stage. Third, because ICO issuers do not suffer from dilution, which reduces their control over the firm, they can engage in more independent, innovative decision making and pursue long-term strategies, instead of engaging in short-sighted behaviors under pressure from investors.
Will ICOs shorten firms' lifespans owing to poor corporate governance, or increase firms' lifespans due to their advantages？ To answer this question, we collect data on firms in mainland China that raised capital through ICOs from January 1, 2016, to June 30, 2018. We use propensity score matching to match each ICO firm with a VC-backed firm in the same industry and year, ensuring that they have similar ownership structures and sizes.Based on the matched sample, we find that ICOs significantly shorten the lifespans of start-ups compared with equity financing. The results remain robust after adding more control variables and after applying the impacts of the opening of treaty ports as an instrumental variable. Furthermore, the results indicate that ICOs shorten firm lifespan because they hinder firms from deepening their human capital. Regarding the macroeconomic consequences, the adverse impacts caused by ICOs have worsened the regional credit environment, which notably drives the increase in regional financing costs. Further research suggests a more significant negative effect of ICOs on start-ups with poorer information disclosure, less attention from government officials,and less media supervision.
Our study offers important implications in two areas. First, because ICOs as an emerging financing method have significant adverse effects on firm lifespan, managers should weigh the pros and cons when adopting this method. Second, China's ban on ICOs is suited to the current institutional environment. In countries with imperfect legal systems, a disruptive technology will have negative impacts if not properly applied. Thus, it is necessary for the government to regulate financial innovations given the institutional environment.
Our paper makes three contributions to the literature. First, there has been little empirical research on the influence of ICOs on corporate financial behaviors. We collect data on all ICO projects in mainland China and are the first to reveal the adverse effects of this emerging financing method on firm lifespan, which supports the ban on ICOs by the People's Bank of China and provides empirical evidence for the need to regulate financial innovations in China. Second, our paper contributes to the literature on corporate capital structure. Because firms in mainland China follow the “one-share-one-vote” principle, no research has examined the impacts of dual-class shares on Chinese start-ups. Using a novel sample of ICO firms, our paper studies how dual-class shares harm corporate governance mechanisms and the development of firms under imperfect legal systems. Third, our paper extends the literature on the lifespans of start-ups. This study not only addresses the gap in understanding firms' financing methods and lifespans but also gives insights into the factors that influence the long-term development of start-ups.
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Received: 16 January 2019
Published: 02 July 2020
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