Paper Spotlight: The Wisdom of Crowds in FinTech: Evidence from Initial Coin Offerings

Jongsub Lee

Tao Li

Donghwa Shin








Initial coin offerings are fast becoming a new type of crowdfunding for blockchain-related startups. In this type of offerings, an entrepreneur raises capital through the creation and selling of virtual currencies or “tokens,” which themselves give rights to their holders (for example, access to a platform). As is to be expected, there are severe problems of information asymmetry associated with these instruments and capital raising mechanisms, especially due to the lack of the traditional underwriting process. These challenges could lead to failures of these crowdfunding exercises. In the paper “The Wisdom of Crowds in FinTech: Evidence from Initial Coin Offerings,” Jongsub Lee, Tao Li, and Donghwa Shin investigate whether the void created by the absence of an underwriter can be filled by the “wisdom of crowds” instead, defined as the collective opinion of a group of individuals rather than that of a single expert. The authors use the weighted average of ratings issued by analysts active on a prominent rating platform to capture the wisdom of the crowds. The paper finds that favorable ratings issued by analysts with diverse backgrounds are associated with fundraising success, aggressive initial token subscriptions, and long-run returns. Interestingly, analyst ratings predict potential fraud and token-price volatility, areas of considerable interest of regulators and market participants. Put together, these results point to an important role played by online analysts to deal with information problems in blockchain-related startups. These results have implications that go beyond the initial coin offerings, since the wisdom of crowds phenomenon is becoming more pervasive among FinTech platforms.

Spotlight by Andrew Ellul
Photos courtesy of Jongsub Lee, Tao Li, Donghwa Shin
First published September 2, 2021

Paper Spotlight: Investor Rewards to Climate Responsibility: Stock-Price Responses to the Opposite Shocks of the 2016 and 2020 U.S. Elections

Stefano Ramelli

Alexander F. Wagner

Alexandre Ziegler

Richard J. Zeckhauser








Recent survey evidence shows that the list of institutional investors paying close attention to environmental issues, with a consequent impact on their investment decisions, is increasing. A central factor that ought to be considered is the role of government regulation, especially the uncertainty surrounding it, and subsequent response of firms to those regulations against the background of a worsening environmental scenario. This is the dimension that Stefano Ramelli, Alexander F. Wagner, Alexandre Ziegler, and Richard J. Zeckhauser, investigate in their paper Investor Rewards to Climate Responsibility: Stock-Price Responses to the Opposite Shocks of the 2016 and 2020 U.S. Elections. The authors argue that analysis of firms’ climate-related performance so far ignore the fact that firms differ with respect to both current environmental footprint and to climate responsibility. The latter, which includes firms’ future-oriented strategies and voluntary initiatives on the road to transitioning to a low-carbon economy, is the dimension mostly overlooked so far and the paper’s major contribution. The authors treat these two dimensions of the challenge separately and do so by exploiting stock price reactions to the shock to climate policy following the 2016 U.S. election, and the opposite shock from the 2020 election. These two political shocks provide a good laboratory to analyze the interconnections between climate regulation, firms’ climate-related performance, and firm value. The authors find that, while investors reacted to the 2016 election by rewarding carbon-intensive firms, investors also rewarded companies that showed stronger commitment to the environmental transition and climate strategies. How should one interpret these findings? The authors provide what they call the “boomerang hypothesis” as an explanation, where long-term investors expected the roll-back of climate regulation over the Trump administration to be transitory in nature and a blip against a backdrop of tightening environmental regulations as the corporate world grapples with how to achieve more ambitious greenhouse gas emissions. The evidence is consistent with the view that the Trump Administration’s expected environmental hostility may have led to higher, not lower, demand for climate-responsible firms by long-term investors.

Spotlight by Andrew Ellul
Photos courtesy of Stefano Ramelli, Alexander F. Wagner, Alexandre Ziegler, and Richard J. Zeckhauser
First published August 17, 2021

Paper Spotlight: Efficient Programs to Support Businesses During and After Lockdowns

Thomas Philippon

The scale and scope of various government interventions around the globe in the aftermath of the COVID-19 outbreak have been nothing short of staggering. Programs have come in different forms: guaranteed loans, equity injections, bank loans to SMEs that can be transformed into government-financed grants, etc. The actions taken in the initial stages of the outbreak, necessary to fight the economic fallout, are bound to generate major spillovers going forward. Very high firm indebtedness is likely to be a major concern. One reason is likely to be the large number of insolvencies, thus raising a major question that policymakers will have to grapple with: will there be excessive liquidations from a social point of view? It is time to start asking these questions to prepare for this eventuality that can bring havoc to societies. In the paper “Efficient Programs to Support Businesses During and After Lockdowns,” Thomas Philippon makes the point that firm failures in times of high unemployment and when wages are downward rigid, such as the present environment, are likely to be inefficiently high and an optimal mitigation policy is required. Thomas theoretically shows how it is optimal for the government to offer a premium for the continuation of a firm (in the form of an extra haircut the government accepts) in order to induce efficient restructurings, liquidations, and continuation of otherwise viable firms. From a social welfare point of view, governments will not want to prevent all liquidations, but rather to nudge private incentives toward continuation when a firm is viable once the pandemic is over. The most important challenge:  how to carry out optimal interventions when we know that governments have limited information about the quality of firms. The paper suggest that the government can use the behavior of private creditors to reach the efficient outcome.

Spotlight by Andrew Ellul
Photo courtesy of Thomas Philippon
First published January 14, 2021

Paper Spotlight: Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash

Rui Albuquerque

Yrjo Koskinen

Shuai Yang

Chendi Zhang








The COVID-19 pandemic, with its heavy toll on human lives, unemployment, and financial distress, should be considered as an important acid test for firms’ professed investments in their responsibility toward society. It is during such times that we can better understand how to interpret the Environmental, Social, and Governance (ESG) scores, standard proxies for firms’ corporate social responsibility, and what is really driving them. The paper “Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash,” by Rui Albuquerque, Yrjo Koskinen, Shuai Yang, and Chendi Zhang, has this objective. The authors show that U.S. firms with higher Environmental and Social (ES) scores were more resilient during the COVID-19 induced stock market crash: these stocks suffered lower stock price declines and lower volatility compared to other firms. The authors then investigate how ES policies build resiliency and look at theories of customer and investor loyalty. Firms with high customer and investor loyalty experienced the strongest stock price performance. Customer loyalty translated into higher operating profit margins of firms with high ES scores, even at a time when the economy as a whole was suffering through the first stages of a contraction. Overall, the results in the paper lend support to the view that consumer and investor loyalty play important roles in making high ES firms more resilient during stressful times.

Spotlight by Andrew Ellul
Photos courtesy of Rui Albuquerque, Yrjo Koskinen, Shuai Yang, and Chendi Zhang
First published August 3, 2020

Paper Spotlight: Institutional Investors and Hedge Fund Activism

Xianjue Wang

Laura Starks

Simi Kedia

The relationship between hedge fund activists and institutional shareholders in firms targeted by activists could be fraught with conflicting interests, making it a very important question to explore. In the paper “Institutional Investors and Hedge Fund Activism,” Simi Kedia, Laura Starks, and Xianjue Wang study how differences among institutional investors impact their willingness to support hedge fund activists, the impact on the campaign’s success, and potential value created from hedge fund activism. Simi, Laura, and Xianjue find that “activism-friendly institutional ownership” is associated with a much greater likelihood, than other types of institutional ownership, with the propensity of a firm being targeted. This result is suggestive of an assortative match between hedge fund activists and the firm’s ownership base. The paper also finds that pre-event activism-friendly ownership is associated with significantly higher long-term stock returns and operating performance of the target firm. These results help us understand how a firm’s ownership, specifically the type of institution, matters for the success of failure of campaigns. They are consistent with a role for the activism-friendly institutions in creating the right environment for hedge fund activists to push for changes in firm decisions and the subsequent impact on firm value. This paper is coming soon to advance access.

Spotlight by Andrew Ellul
Photos courtesy of Simi Kedia, Laura Starks, and Xianjue Wang