Asset Pricing in the Dark: The Cross Section of OTC Stocks
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Assaf A. Shtauber
Columbia University - Columbia Business School
Paul C. Tetlock
Columbia Business School - Finance and Economics
July 1, 2013
Over-the-counter (OTC) stocks are far less liquid, disclose less information, and exhibit lower institutional holdings than listed stocks. We exploit these different market conditions to test theories of cross-sectional return premiums. Compared to premiums in listed markets, the OTC illiquidity premium is several times higher, the size, value, and volatility premiums are similar, and the momentum premium is three times lower. The OTC illiquidity, size, value, and volatility premiums are largest among stocks held predominantly by retail investors and those not disclosing financial information. Theories of differences in investors’ opinions and limits on short sales help explain these return premiums.
Number of Pages in PDF File: 76
Keywords: Illiquidity Premium, Limits to Arbitrage, Over-the-Counter Markets, OTC Stocks, Pink Sheets, Bulletin Board, Disclosure, Return Anomalies
JEL Classification: G10, G12, G14
Date posted: November 26, 2010 ; Last revised: August 2, 2013
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