Conflicted Analysts and Initial Coin Offerings

This paper studies the contribution of analysts to the functioning and failure of the market for initial coin offerings (ICOs). The assessments of freelancing analysts exhibit biases because of reciprocal interactions of analysts with ICO team members. Even favorably rated ICOs tend to fail raising some capital when a greater portion of their ratings reciprocate prior ratings. Ninety days after listing on an exchange, the market capitalization relative to the initial funds raised is smaller for tokens with more reciprocal ratings. These findings suggest that conflicts of interest help explain the failure of ICOs. This paper was accepted by Bruno Biais, special issue of Management Science: blockchains and crypto economics. Funding: A. Barth acknowledges financial support from the Chaire Fintech at University Paris Dauphine - PSL. A. F. Wagner acknowledges financial support from the University of Zurich Research Priority Program “Financial market regulation.” This paper was initiated when A. F. Wagner was visiting the Center for Advanced Studies on the Foundations of Law and Finance, funded by the German Research Foundation under the project FOR 2774 at Goethe University Frankfurt. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2021.02928 .