CEO Emotions and Underpricing in Initial Coin Offerings

Abstract

CEO emotions are difficult to measure and hence empirically understudied. However, using artificial emotional intelligence, positive and negative affects can be identified from facial muscle contraction-relaxation patterns obtained from public CEO photos during initial coin offerings (ICOs), i.e., blockchain-based issuances of cryptocurrency tokens to raise growth capital. The results suggest that CEO affects impact firm valuation in two ways. First, CEOs’ own firm valuations conform more to those of industry peers if negative affects are pronounced (conformity mechanism). Second, investors use CEO affects as signals about firm value and discount when negative affects are salient (signaling mechanism). Negative affects can reduce firm value by up to 15%. Both mechanisms are stronger in the presence of asymmetric information and robust to tests of endogeneity.