Project Description

Cheap Signals in Security Token Offerings (STOs)



Startups and small and medium-sized enterprises (SMEs) account for a significant share of the economy but are often constrained in their growth potential, as they have difficulty accessing capital markets (Carpenter & Peterson, 2002).

More recently, offerings of blockchain-based security tokens show promise to better fit firms’ and investors’ needs. Security tokens are blockchain-based tokens that represent a security, as defined by the relevant jurisdiction. In theory, this has a number of advantages:

  1. Tokens are immediately transferable and can be traded 24/7 on secondary markets,
  2. clearing and settlement is a matter of only a few minutes,
  3. tokens can be held personally, i.e. brokers and custody accounts are no longer required and
  4. the underlying blockchain ensures transparency of all transactions.

We look at this phenomenon by analyzing empirically whether cheap signals are used in 151 STOs and whether they have an effect on funding success. Signaling theory (Spence, 1973) postulates that signals can alleviate asymmetric information. Cheap signals do not require costly efforts for firms and could therefore potentially be exploited by firms in order to influence their funding success. For instance, fake social information represents a clear thread to the provision of trust and credibility of web content (Luca & Zervas, 2013).

We discuss  academic research in the context of signaling theory with respect to human capital, network size, project elaboration and social media and derive our hypotheses from these. For example, the metric Twitter followers represents a cheap signals, as it can be inflated rather easily by buying followers. Our results indicate that cheap signals of social media channels (Twitter), project elaboration and human capital can explain funding success of STOs.

This study provides the first overview of security tokens and the STO model for corporate financing. Our analysis investigates security tokens from the perspective of a firm looking to raise capital. The results show that cheap signals are effective, which raises concerns for investor protection.

Keywords: entrepreneurial finance; financial innovation; blockchain technology; tokenization; crowdfunding; initial coin offering; initial public offering; corporate finance

Suggested citation:

Ante, L. & Fiedler, I. (2020). Cheap Signals in Security Token Offerings (STOs). Quantitative Finance and Economics, 4(4), 608-639. doi: 10.3934/QFE.2020028


21 Sep 2020


Quantitative Finance and Economics