Textual Information and its Impact on Investors

Accounting is fundamentally about information. In addition to the numeric information in the financial statements, there is a large amount of unstructured textual information in companies’ disclosures. For example, publicly traded companies are required to disclose both audited financial statements and textual information in their annual reports. In recent years, some FinTech companies have argued that such disclosure regulations are outdated, do not serve their purpose of informing investors, and place too onerous a burden on start-up companies. For example, one of the most touted advantage of blockchain is its decentralized nature which makes it difficult to regulate. Granted, start-up companies usually do not have financial statements. In fact, some have nothing more than an idea. But even for such companies, are some types of information, for example, textual information, useful? Do investors value such information?

In the past two years, many early stage projects on blockchain have used an innovative funding method called Initial Coin Offering (or ICO), raising over US$20 billion dollars as of July 2018. In an ICO, project founders issue tokens on blockchain to investors in exchange for capital. Although ICOs are often compared to Initial Public Offerings (IPOs), where investors receive stocks representing ownership of the issuer, they are fundamentally different in several aspects. The two most significant differences are the characteristics of the companies and what investors receive in exchange for their capital. Issuers in IPOs are usually mature companies with proven track records, while issuers in ICOs are at the early stage, and some do not yet have any products.

Is disclosure useful in the ICO market? 

While investors in IPOs receive stocks, the tokens in ICOs do not represent ownership. Instead, they provide utility on the blockchain. That is, token holders have the right to use the project’s service in the future. Thus, ICO issuers usually claim that ICOs are not subject to securities regulation, and unlike issuers in IPOs, who are required to provide audited financial statements, issuers of ICOs are not required to provide any verifiable information about their project. Not surprisingly, in such an unregulated market, the amount and quality of textual disclosures vary significantly. An interesting question arises. Is information still useful in the ICO market? 

In a recent research project, a team of four accounting professors from Columbia University, London Business School and University of Utah investigated the role of textual information in the ICO process (Bourveau, De George, Ellahie and Macciocchi, 2018). In most ICO projects, the founding team provides two main types of disclosures to token buyers, a whitepaper and the project’s source code. Whitepapers are unaudited marketing documents and can include information about the business proposition for the token, market opportunity and solutions, technology, proof-of-concept case studies, expected progress timeline, identity and background of the team. They may also include details of the ICO process, token vesting restrictions, and how the team plans to use the proceeds from the ICO. Some whitepapers are extremely short, while others are very detailed. The length of whitepapers varies from two pages to 94 pages, with the median containing 24 pages. Some issuers do not even disclose the identity of the team or the founders.

The researchers then summarize the textual information in the whitepapers and investigate how it impacts the chance of ICO funding success and the project outcomes. First, they find that textual information disclosure of the token issuers is useful to investors. When whitepapers are more informative, that is, when they contain more detailed information about the projects and the ICO process, projects are more likely to be successfully funded. When examining the amount of capital raised in the project, the research also finds that information in the whitepapers can increase the funding level of projects. Both pieces of evidence are consistent with the idea that investors value textual information in whitepapers.

Can textual information predict success?

Next, they investigate whether textual information in whitepapers contain clues that investors can use to predict project success. Since ICOs are usually utilized by early stage projects, which tend to have a high failure rate, it is important for ICO investors to understand and assess this risk. The research uses the subsequent price of ICO tokens to measure the project performance and assumes that if the project fails, the token price will tank. Not surprisingly, they find that when the textual information in whitepapers is opaque, there is a higher probability that the projects’ token price will crash, and that the token trading becomes illiquid.

These results are intuitive, as a whitepaper is often the only source of information investors receive about the project. They are also consistent with prior research that finds investors valuing textual information in general. Professor Amy ZANG, in the accounting department, and I have extensively studied how investors use the information contained in textual disclosures. In our research, we focus on three types of textual disclosures: management disclosures that are subjected to regulations, such as those in the company annual reports; management disclosures in more casual channels, such as earnings conference calls; and investment reports written by financial analysts.

In every setting, we find that textual disclosures contain a wealth of useful information about companies. For example, in a paper published in Management Science earlier this year, we find that subsequent to earnings conference calls, financial analysts cover a wide range of topics. These include the company’s current and future financial performance, recent corporate events, business strategies, management effectiveness, competitive landscape, and macroeconomic environment (HUANG, LEHAVY, ZANG and ZHENG 2018). Do investors find such information useful? The answer is yes. Investors value the company at a higher price when analysts are optimistic in their discussions, and they punished  the company’s stock when the reports are negative.

We also find that investors especially value the information from financial analysts when analysts discover new information not disclosed by the managers. Analysts conduct their own private research and channel checks, for example, by visiting stores and warehouses, investigating supply chains, and surveying customers. They have private interactions with not only CEOs and CFOs, but also division-level managers from operating regions and product lines. They package information collected from multiples sources, such as other information intermediaries, peer firms in the industry, independent research agencies, and government agencies, and undertake original analysis by “connecting the dots.” They also generate new information signals, such as firms’ valuations, earnings forecasts, and long-term growth rates, using their high level of financial expertise.

Even though textual information is useful, it appears that investors do not fully understand it, and sometimes underreact to it. For example, a large number of ICOs of low-quality projects, with poor information disclosure, still managed to get funded in the first half of 2018. Thus, learning how to interpret textual information can aide investors and help them avoid such investment pitfalls.


Thomas Bourveau, Emmanuel T. De George, Atif Ellahie, and Daniele Macciocchi (2018), Initial Coin Offerings: Early Evidence on the Role of Disclosure in the Unregulated Crypto Market (

Allen H. Huang, Reuven Lehavy, Amy Y. Zang, and Rong Zheng (2017), Analyst Information Discovery and Interpretation Roles: A Topic Modeling Approach, Management Science (

HUANG, Allen

Associate Dean (UG Programs), Associate Professor