The (Limited) Power of Blockchain Networks for Information Provision

Abstract

We investigate the potential and limits of privacy-preserving corporate blockchain applications for information provision. We provide a theoretical model in which heterogeneous firms choose between adopting a blockchain application or relying on traditional third-party intermediaries to inform the capital market. The blockchain’s ability to generate information depends on each firm’s data profile and all firms’ endogenous adoption decisions. We show that blockchain technology can improve the information environment and outperform traditional institutions with firms’ adoption decisions serving as a credible value signal and the application uncovering firm values by analyzing all participating firms’ data. However, we also characterize an adverse mixed-adoption equilibrium in which neither of the two channels realizes its full potential and information provision declines not only for individual firms, but also in aggregate. The equilibrium is a warning sign that has broad implications for policymakers’ regulatory effort and investors’ assessment of corporate blockchain applications. This paper was accepted by Suraj Srinivasan, accounting. Funding: B. Franke and Q. Gao Fritz gratefully acknowledge financial support from the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) Project-ID 403041268–TRR 266 Accounting for Transparency. A. Stenzel gratefully acknowledges financial support from the DFG through CRC TR 224 (Project C03) during prior employment at the University of Mannheim. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.4718 .