Signaling in the Market for Security Tokens

Abstract

Security token offerings (STOs) are a new means for ventures to raise funding, where digital tokens are issued as regulated investment products on the blockchain. We study market outcomes in the primary and secondary markets for security tokens and examine the associated determinants in the context of signaling theory. We analyze success determinants of 138 STOs and find that a pre-sale and the announcement of token transferability are positively related to the funding success and serve as positive quality signals for investors to overcome information asymmetries. We examine 108 security tokens traded on centralized and decentralized exchanges related to the rapidly evolving area of decentralized finance. There is hardly any underpricing in the market, and it is positively associated with the crypto market sentiment as an external signal. When traded on the secondary market, security tokens generate both extremely positive and negative returns for various short-term time horizons. We disentangle the liquidity situation in the market between centralized and decentralized exchanges and find that decentralized marketplaces are less liquid and offer lower barriers to entry, indicating slow market completion.