Righteous among the Wicked: How Entrepreneurs Signal Integrity in Markets Susceptible to Fraud

Abstract

Many markets are structurally susceptible to fraud, defined as conscious attempts to deceive stakeholders to obtain something of value. Signaling theory states that entrepreneurs with high-quality attributes normally attract resources by providing signals of their qualities that could not be provided by those with low-quality attributes. However, this mechanism is unlikely to work if communication is easily falsified. In this paper, I study if and how high-quality entrepreneurs can distinguish themselves from lower-quality peers in such markets, drawing on the market for cryptocurrencies as a particularly revealing example. Applying an abductive mixed-method approach, I first identify communicational practices entrepreneurs use to indicate high quality. I then show that these practices in my data do not differentiate between entrepreneurs that perform well or poorly, but a subset of these practices differentiate between entrepreneurs with low and high integrity. Entrepreneurs thus reveal their integrity to investors. A complementary explorative study indicates that the heterogeneous temporal payout structure of different communicational practices may explain this unexpected finding, which differentiates the attractiveness of communicational practices based on an entrepreneur’s temporal horizon. I call this the “temporal alignment mechanism.”