The Information Content of ICO White Papers

Abstract

White papers are likely the most important source of information provided to potential Initial Coin Offering (ICO) investors in platform-based ventures that may reduce information asymmetry between ICO issuers and investors. We use textual analysis to measure the information content of white paper documents. Testing predictions of adverse selection and signaling during the pre-ICO, ICO, and post-ICO phases, observed empirical associations between ratings, ICO success, funding volume, token exchange-listing probability, underpricing, cumulative returns, and trading volume are jointly consistent with high-quality ICO issuers signaling their type by providing more informative content, i.e. excess or new textual information not contained in recent and peer white papers. Moreover, signaling is likely impaired during the ICO process as investors include potentially biased expert ratings in their investment decision-making. As a result, low-quality ICO issuers successfully raise funds and exchange-list their tokens, leading to inefficient funding allocation, generating potentially large adverse selection costs, and increased risk of market failure.