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Artificial Emotional Intelligence


This is an R script that I used in my paper CEO Emotions and Firm Valuation in Initial Coin Offerings: An Artificial Emotional Intelligence Approach which computes the seven basic Ekman (1999) emotions from facial muscle contraction-relaxation patterns based on Microsoft’s Face API. Read more


Corporate governance convergence in the European M&A market

Finance Research Letters (with W. Drobetz)

Abstract: Cross-border acquisitions lead to improvements in shareholder rights and more dispersed ownership structures in a large sample of intra-European takeovers. These findings are evidence of corporate governance convergence toward the Anglo-Saxon system through cross-border takeovers. However, we find no support for the corporate governance motive hypothesis in cross-border acquisitions even after accounting for potential sample selectivity. Although acquirers have significantly better shareholder rights than their targets, there are no robust marginal bidder wealth effects for firms that acquire either weaker or stronger governance foreign targets. Instead, bidder wealth effects in cross-border acquisitions are better explained by acculturation costs. [working paper version here]

Investor Sentiment and Initial Coin Offerings

The Journal of Alternative Investments Spring 2019 (with H. Schröder and W. Drobetz)

Abstract: The authors examine to what extent the market for initial coin offerings (ICOs) is driven by investor sentiment. Their results, based on a comprehensive set of sentiment and coin price data, suggest that the ICO market is driven by crypto-related sentiment, but is almost unrelated to general capital market sentiment. Among the crypto-related sentiment, social media channels, rather than traditional news channels, are the main source of investor sentiment. The authors find that ICO firms exploit “windows of opportunity” and avoid periods of negative sentiment. Coins listed during periods with negative investor sentiment generate negative returns in the short run. Moreover, returns to investors on the first day of trading predict long-run returns up to six months. [working paper version here]

Token Sales and Initial Coin Offerings: Introduction

The Journal of Alternative Investments Spring 2019

Abstract: Token sales or initial coin offerings (ICOs) are smart contracts on a blockchain designed to raise external finance by issuing tokens or coins. This introduction provides an overview of this novel financing method. Differences between tokens and coins, types of tokens, and various ICO mechanisms are discussed. The author also describes the evolution of the ICO market and surveys some advantages of ICOs. [working paper version here]

Initial Coin Offerings, Asymmetric Information, and Loyal CEOs

Small Business Economics, Forthcoming

Abstract: A defining feature of initial coin offerings (ICOs) is that entrepreneurs bear the full marginal investment cost but profit only partially from the marginal investment payoff. This design may exacerbate agency conflicts inherent in corporate finance. As a consequence, signals of entrepreneurial quality such as CEO loyalty, which is an established concept in social psychology and can easily be linked to potential agency conflicts in corporate settings, might be a first-order determinant of economic outcomes in the ICO market. Consistent with this, I find that loyal CEOs have to offer less financial incentives to attract investors and are still able to raise more proceeds, conduct ICOs more thoroughly, and are less likely to fail. The findings are consistent with the hypothesis that asymmetric information between entrepreneurs and investors entail agency costs that are decreasing in CEO loyalty. [working paper version here]

The Pricing and Performance of Cryptocurrency

The European Journal of Finance

Abstract: This paper examines the performance of cryptocurrencies issued in initial coin offerings (ICOs) over a three-year period after the initial exchange listing. Average (median) ICO underpricing amounts to 15% (3%), even though 4 out of 10 ICOs destroy value on the first trading day. Liquidity, market capitalization, and high-low price ratios predict returns. Long-run buy-and-hold returns are positive for the mean and negative for the median. For holding periods between one and twenty-four months, the median ICO depreciates by 30%. Evidently, there is substantial positive skewness in the cryptocurrency market. Further, a size effect emerges from the data as an empirical regularity: Large ICOs are more often overpriced and underperform in the long run. [working paper version here]

Initial Coin Offerings


Abstract: This paper examines the market for initial coin offerings (ICOs). ICOs are smart contracts based on blockchain technology that are designed for entrepreneurs to raise external finance by issuing tokens without an intermediary. Unlike existing mechanisms for early-stage finance, tokens potentially provide investors with rapid opportunities thanks to liquid trading platforms. The marketability of tokens offers novel insights into entrepreneurial finance, which I explore in this paper. First, I document that investors earn on average 8.2% on the first day of trading. However, about 40% of all ICOs destroy investor value on the first day of trading. Second, I explore the determinants of market outcomes and find that management quality and the ICO profile are positively correlated with the funding amount and returns, whereas highly visionary projects have a negative effect. Among the 21% of all tokens that get delisted from a major exchange platform, highly visionary projects are more likely to fail, which investors anticipate. Third, I explore the sensitivity of the ICO market to adverse industry events such as China’s ban of ICOs, the hack of leading ledgers, and the marketing ban on FaceBook. I find that the ICO market is highly susceptible to such environmental shocks, resulting in substantial welfare losses for investors. [working paper version here]



Competition Policy and the Profitability of Corporate Acquisitions

Journal of Corporate Finance, 62, 2020 (with G. Dissanaike and W. Drobetz)

Nominated for best paper award (Financial Management Association)

Abstract: Merger control exists to help safeguard effective competition. However, findings from a natural experiment suggest that regulatory merger control reduces the profitability of corporate acquisitions. Uncertainty about merger control decisions reduces takeover threats from foreign and very large acquirers, therefore facilitating agency-motivated deals. Valuation effects are more pronounced in countries with stronger law enforcement and in more concentrated industries. Our results suggest that competition policy may impede the efficiency of the M&A market. [working paper version here]

Antitakeover Provisions and Firm Value: New Evidence from the M&A Market

Journal of Corporate Finance, 62, 2020 (with W. Drobetz)

Abstract: New evidence from acquisition decisions suggests that antitakeover provisions (ATPs) may increase firm value when internal corporate governance is sufficiently strong. We document that, in Germany, firms with stronger ATPs, and particularly supermajority provisions, are better acquirers. Managers of high-ATP firms create value in acquisitions by making governance-improving deals. They are more likely to engage in acquisitions that reduce their own entrenchment level and less likely to invest in declining industries. Further, our empirical evidence is consistent with a short-termist interpretation. We show that takeover threats can induce myopic investment decisions, which ATPs can mitigate. They also lead managers to engage more often in value-creating long-term and innovative investing, and increase their sensitivity to investment opportunities. Our findings contribute to a growing literature challenging conventional wisdom that the agency-increasing effect of ATPs empirically dominates the myopia-eliminating effect, suggesting that a more contextual view of the value implications of ATPs is necessary. [working paper version here]

Institutional Investors and Post-ICO Performance: An Empirical Analysis of Investor Returns in Initial Coin Offerings (ICOs)

Journal of Corporate Finance, 64, 2020 (with C. Fisch)

Abstract: We examine the role of institutional investors in Initial Coin Offerings (ICOs). Taking a financial investor’s perspective, we assess the determinants of post-ICO performance via buy-and-hold abnormal returns in a sample of 565 ICO ventures. Conceptually, we argue that institutional investors’ superior screening (selection effect) and coaching abilities (treatment effect) enable them to partly overcome the information asymmetry of the ICO context and extract informational rents from their ICO investments. We find that institutional investor backing is indeed associated with higher post-ICO performance. Disentangling the selection and treatment effects econometrically, we find that both of these effects explain the positive impact on post-ICO per-formance. Overall, our results highlight the importance of institutional investors in the ICO context. [working paper version here]

Entrepreneurial Finance and Moral Hazard: Evidence from Token Offerings

Journal of Business Venturing, forthcoming

Abstract: This paper provides the first evidence of a moral hazard in signaling in an entrepreneurial finance context, by examining token offerings or Initial Coin Offerings (ICOs). Entrepreneurs ability to signal quality is crucial to succeeding in the competition for growth capital. However, the absence of institutions that verify endogenous signals may induce a moral hazard in signaling. Consistent with this hypothesis, artificial linguistic intelligence indicates that token issuers systematically exaggerate information disclosed in whitepapers. Exaggerating entrepreneurs raise more funds in less time, suggesting that investors do not see through this practice initially. Eventually, the crowd learns about the exaggeration bias through trading with other investors. The resulting investor disappointment causes the cryptocurrency to depreciate and the probability of platform failure to increase. [working paper version here]

CEO Emotions and Firm Valuation in Initial Coin Offerings: An Artificial Emotional Intelligence Approach

Strategic Management Journal, forthcoming

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. [working paper version here]





This is the econometrics module that I taught in the PhD program at Hamburg Business School, University of Hamburg, Germany in 2018. Read more


The Economics of Law Enforcement: Quasi-Experimental Evidence from Corporate Takeover Law


R&R at Journal of Corporate Finance (with G. Dissanaike, W. Drobetz, J. Rocholl)

Nominated for best paper award (Financial Management Association)

Abstract: This paper examines the impact of takeover law enforcement on corporate acquisitions. We use the European Takeover Directive as a natural experiment, which harmonizes takeover law across countries, while leaving its enforcement to the discretion of individual countries. We exploit this heterogeneity in enforcement quality across countries in a difference-in-differences-in-differences model, while employing an overall inductive research approach, following the recommendation in Karpoff and Whittry (2018). We find that acquirer returns increase in countries with changes in takeover law, driven by improved target selection and lower cost of financing. The increase in acquirer returns is lower in weak enforcement jurisdictions, which we identify by developing a novel Takeover Law Enforcement Index (TLEI). The findings show that takeover law can mitigate agency conflicts, but its true value depends on its enforcement. Our results are robust to a number of robustness tests.

Private Investments in Public Equity: Discount for Lack of Marketability and Fair-Value Hypothesis


Work in progress (with A. Bernardo, I. Welch)

Working paper will be posted soon.

Abstract: The pricing of illiquidity (due to lack of marketability) is a contentious issue in Private Investments in Public Equity (PIPEs). We exploit the 2008 amendment to Rule 144(k) to estimate the effect of the shortening of the mandatory holding period on the discount for lack of marketability (DLOM). The annualized inferred DLOM is 3-4%. The DLOM can be larger when marketability is a greater concern. Our paper also contributes to the PIPE performance puzzle (Hertzel et al., 2002). While non-participating investors in PIPE companies incur significant losses post-PIPE, participating investors purchasing stock privately at a discount earn a zero-abnormal return over the expected illiquidity period. Our results support the hypothesis that PIPE investors are able to negotiate discounts commensurate with the expected underperformance of PIPEs companies.