CEO emotions and firm valuation in initial coin offerings: An artificial emotional intelligence approach

Abstract

Research Summary How emotions impact firm valuation is empirically understudied because affective traits are difficult to quantify. 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, that is, 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). Both mechanisms are stronger in the presence of asymmetric information. Managerial Summary The purpose of this paper is to advance our understanding of how CEOs' affective traits influence firm valuation by both, CEOs themselves and investors. The effect of CEO emotions is plausibly particularly pronounced for start‐up firms, whose success prospects critically depend on their leaders. My results suggest that CEO emotions impact underpricing in initial coin offerings twofold. First, negative emotions are associated with CEOs choosing an underpricing level that closely conforms to their peer firms' average. Second, investors react to negative CEO emotions by demanding higher discounts on firm value. These effects are more pronounced when there is relatively little public information about the ICO firm. My paper is accompanied by artificial emotional intelligence software for implementation in practice and future research.

Success factors of initial coin offerings

“…While there are several important papers on the heterogeneity of crowdfunding platforms by Rossi and Vismara (2018). Bassani et al (2019) and Cumming et al (2019a), there is limited evidence for ICO platforms and information exchange and the role of managers in enhancing ICO performance (Boreiko & Risteski, 2021;Momtaz, 2021). While crowdfunding platforms govern the fundraising process by setting their particular platform rules, ICO is not listed on platforms and usually create a website that provides aggregate information and guidance, including expert ratings (Block et al, 2021).…”

“…While crowdfunding platforms govern the fundraising process by setting their particular platform rules, ICO is not listed on platforms and usually create a website that provides aggregate information and guidance, including expert ratings (Block et al, 2021). As such, screening and due diligence are entirely left to ICO investors and may be less transparent, requiring more information, with a high likelihood of information asymmetries (Momtaz, 2021).…”

A Survey of Fintech Research and Policy Discussion

“…Akyildirim et al (2020) find that stock prices of companies that announce interest in cryptocurrencies earn a significant premium, suggesting that crypto announcements can be used to manipulate the associated company's stock price. Other related studies on the returns and success of ICOs include Adhami, Giudici, and Martinazzi (2017); Hu, Parlour, and Rajan (2018); Fisch and Momtaz (2020); Momtaz (2020); and Benedetti and Kostovetsky (2018).…”

Initial coin offerings: an emergent research area

“…This group also includes the impact of CEO emotions on underpricing in ICOs (Momtaz, 2020a); the sensitivity to environmental shocks (e.g. China's ban of ICOs and the marketing ban on FaceBook), and digital social capital on ICO market capitalization (Perez et al, 2020).…”

“…ICOs offer developers a return for open source decentralized networks, which traditionally rely on volunteer work (e.g. Wikipedia), balancing the interests of promoters and users (Popper, 2016;Momtaz, 2020aMomtaz, , 2020bMomtaz, , 2020cMomtaz, , 2020d. ICOs favour the creation of an ecosystem enabling the development of a new product with a ready customer base (Deloitte 2018).…”