Other Publications

Valuing start-up firms: A reverse-engineering approach for fair-value multiples from venture capital transactions

Finance Research Letters (with J. A. Barg and W. Drobetz)

Abstract: The valuation of start-up firms is challenging, yet highly relevant for entrepreneurs and financiers alike. We reverse-engineer fair-value multiples by comparing the firm value at the time of financing with the firm value at the time of exit. Our framework produces reliable valuation multiples from observed venture capital transactions per industry and financing round. Despite their simplicity, sanity checks confirm that our multiples are highly performant in describing common valuation characteristics. Valuation multiples are higher when more experienced investors are involved, and when the exit occurs through an IPO rather than an M&A. In contrast, later stage financing rounds and larger investment consortia are associated with lower valuation multiples. [working paper version here]

Econometric Models of Duration Data in Entrepreneurship with an Application to Start-Ups Time-To-Funding by Venture Capitalists (VCs)

Journal of Applied Statistics

Abstract: Because time is a key determinant of entrepreneurial decision making, time-to-event models are ubiquitous in entrepreneurship. Widespread econometric misconception, however, may cause complicated biases in existing studies. The reason is spurious duration dependency, a complicated form of endogeneity caused by unobserved heterogeneity. This article discusses the endogeneity problem and methods to debias time-to-event models in entrepreneurship. Simulations and empirical evidence indicate that only the frailty approach yields consistently unbiased parameter estimates. An application to start-up firms’ time-to-funding shows that other methods lead to dramatic biases. Therefore, this article advocates a paradigm shift in the modeling of time variables in entrepreneurship. [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]

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, 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]

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]

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]

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]