Choice Between IEO and ICO: Speed vs. Liquidity vs. Risk

Miglo, Anton (2020): Choice Between IEO and ICO: Speed vs. Liquidity vs. Risk.

Abstract

This paper analyzes a financing problem for an innovative firm that is considering launching a web-based platform. Our model is the first one that analyzes an entrepreneur's choice between initial exchange offering (IEO) and initial coin offering (ICO). Compared to ICO, under IEO the firm is subject to screening by an exchange that reduces the risk of investment in tokens; also the firm gets access to a larger set of potential investors; finally tokens become listed on an exchange faster. We argue that IEO is a better option for the firm if: 1) the investment size is relatively large; 2) the extent of moral hazard problems faced by the firm is relatively large; 3) the degree of investors' impatience is relatively small. We aslo find a non-linear relationship between firm quality and its financing choice. Most of these predictions are new and have not been tested sofar.

• Item Type: MPRA Paper
• Language: English
• Keywords: FinTech; Entrepreneurial Finance; Initial Coin Offering; Initial Exchange Offering; Moral Hazard; Utility Tokens; Listing
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L26 - Entrepreneurship; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M13 - New Firms ; Startups; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O32 - Management of Technological Innovation and R&D

References

Adhami, S., Giudici, G., and Martinazzi, S. (2018). Why do businesses go crypto? An empirical analysis of Initial Coin Offerings. Journal of Economics and Business, 100, 64-75.

Amsden, R., and Schweizer, D. (2018). Are Blockchain Crowdsales the New "Gold Rush"? Success Determinants of Initial Coin Offerings. Working paper. Online: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3163849 (accessed 12 Dec 18).

Ante, L., and Fiedler, I. (2019). Cheap Signals in Security Token Offerings (STOs). BRL Working Paper Series No. 1. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3356303

Ante, L., Sandner, P., and Fiedler, I. (2018). Blockchain-based ICOs: Pure Hype or the Dawn of a New Era of Startup Financing? Journal of Risk and Financial Management, 11(4), 80.

Antonakakis, N., Chatziantoniou, I., and Gabauer, D. (2019). Cryptocurrency Market Contagion: Market Uncertainty, Market Complexity, and Dynamic Portfolios. Journal of International Financial Markets Institutions and Money, 61(C), 37-51. DOI: 10.1016/j.intfin.2019.02.003

Bakos, Y., and H. Ha laburda. The Role of Cryptographic Tokens and ICOs in Fostering Platform Adoption. Working Paper, 2018. http://dx.doi.org/10.2139/ssrn.3207777

Beedham, M. (2019). Here's the difference between ICOs and IEOs. https://thenextweb.com/hardfork/2019/03/21/initial-exchange-offering-ieo-ico/

Catalini, C., and J.S. Gans. (2018). Initial Coin Offerings and the Value of Crypto Tokens. NBER Working Paper, 24418.

Cong, L., Li, Y., and Wang, N. (2018). Tokenomics: Dynamic Adoption and Valuation. Working Paper. https://bfi.uchicago.edu/working-paper/tokenomics-dynamic-adoption-and-valuation/

Cumming, D., Johan, S., and Pant, A. (2019). Regulation of the Crypto-Economy: Managing Risks, Challenges, and Regulatory Uncertainty. Journal of Risk and Financial Management, 12(3), 126. https://doi.org/10.3390/jrfm12030126

Financial Stability Board (2018). Crypto-asset markets Potential channels for future financial stability implications https://www.fsb.org/wp-content/uploads/P101018.pdf

Garratt, R., and van Oordt, M. (2019). Entrepreneurial Incentives and the Role of Initial Coin Offerings, Bank of Canada, Staff Working Paper. https://www.bankofcanada.ca/2019/05/staff-working-paper-2019-18/

Govindan, S., and R. Wilson. (2009). On Forward Induction. Econometrica, 77(1), 1--28.

Harris, M., and Raviv, A. (1991). The Theory of Capital Structure, Journal of Finance, 46 (1), 297-355.

ICO and IEO report (2020), 6th ed. https://www.pwc.ch/en/insights/fs/6th-ico-sto-report.html

Jensen, M., and Meckling, W. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305--360.

Khatib, Hadi (2019). ICO vs IEO vs STO- The Making of an informed crypto investment decision. https://www.ameinfo.com/industry/Crypto/ico-vs-ieo-vs-sto-the-making-of-an-informed-crypto-investment-decision

Lee, J., and Parlour, C. (2019). Consumers as Financiers: Crowdfunding, Initial Coin Offerings and Consumer Surplus, working paper. https://www.chapman.edu/research/institutes-and-centers/economic-science-institute/ _files/ifree-papers-and-photos/parlour-lee-consumers-as-financiers-2019.pdf

Li, J., and Mann, W. (2018). Initial Coin Offering and Platform Building. Working Paper, https://pdfs.semanticscholar.org/309e/f98741d5da2003df8317fd605e1ac83d6fb9.pdf

Miglo, A. (2011). Trade-off, Pecking order, Signalling, and Market Timing Models. In: Baker, H.K. & Martin, G.S. (eds.) Capital structure and corporate financing decisions: theory, evidence, and practice. New Jersey: John Wiley.

Miglo, A. (2019). STO vs ICO: A Theory of Token Issues Under Moral Hazard and Demand Uncertainty, working paper. https://ssrn.com/abstract=3449980 or http://dx.doi.org/10.2139/ssrn.3449980

Miglo, A. (2020a). ICO vs. Equity Financing Under Imperfect, Complex and Asymmetric Information, working paper. SSRN: https://ssrn.com/abstract=3539017

Miglo, A., Lee, Z., and Liang, S. (2014). Capital Structure of Internet Companies: Case Study. Journal of Internet Commerce, 13, 253-281.

Modigliani, F., and Miller, M. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 48 (3), 261--297.

Myalo, A. (2019). Comparative Analysis of ICO, DAOICO, IEO and STO. Case Study, Digital Financial Assets, DOI: 10.26794/2587-5671-2019-23-6-6-25.

OECD (2019), Initial Coin Offerings (ICOs) for SME Financing, www.oecd.org/finance/initial-coin-offerings-for-sme-financing.htm

Wilson, K. E. (2015), "Policy Lessons from Financing Innovative Firms", OECD Science, Technology and Industry Policy Papers, No. 24, OECD Publishing, Paris. http://dx.doi.org/10.1787/5js03z8zrh9p-en