Abstract

http://ssrn.com/abstract=2290492
 


 



The Twilight Zone: OTC Regulatory Regimes and Market Quality


Ulf Brüggemann


Humboldt University of Berlin - School of Business and Economics

Aditya Kaul


University of Alberta - Department of Finance and Statistical Analysis

Christian Leuz


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network

Ingrid M. Werner


The Ohio State University - Fisher College of Business

August 1, 2013

ECGI - Law Working Paper No. 224/2013
Fisher College of Business Working Paper No. 2013-03-09
Charles A. Dice Center Working Paper No. 2013-09
Chicago Booth Research Paper

Abstract:     
We analyze a comprehensive sample of more than 10,000 U.S. stocks in the OTC market. As little is known about this market, we first characterize OTC firms by trading venue and provide evidence on survival, success, frequency of venue changes, reporting status, and trading activity. A large number of new firms appear on the OTC market each year. With few exceptions, these new firms exhibit poor performance and rarely rise to trade on traditional exchanges. We analyze how market liquidity, price efficiency and crash risk, all of which capture aspects of market quality, differ across OTC venues and firms subject to different regulatory regimes, including federal securities and state blue sky laws. We show that OTC firms that are subject to stricter regulatory regimes have higher market liquidity and price efficiency, and lower return skewness. We also analyze OTC market features that are potential substitutes for SEC registration, such as publication in a securities manual or state merit reviews, and provide evidence on their capital-market effects. This evidence is relevant in light of the JOBS Act and the ensuing relaxation of SEC registration requirements. Overall, our results suggest that investors consider information and regulatory differences when trading OTC stocks.

Number of Pages in PDF File: 80

Keywords: Securities Regulation, Disclosure, Liquidity, Blue Sky Laws, Price Efficiency, Pink Sheets, OTC Bulletin Board, JOBS Act

JEL Classification: G14, G15, G30, K22, M41, M48

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Date posted: July 6, 2013 ; Last revised: August 30, 2013

Suggested Citation

Brüggemann, Ulf and Kaul, Aditya and Leuz, Christian and Werner, Ingrid M., The Twilight Zone: OTC Regulatory Regimes and Market Quality (August 1, 2013). ECGI - Law Working Paper No. 224/2013; Fisher College of Business Working Paper No. 2013-03-09; Charles A. Dice Center Working Paper No. 2013-09; Chicago Booth Research Paper. Available at SSRN: http://ssrn.com/abstract=2290492 or http://dx.doi.org/10.2139/ssrn.2290492

Contact Information

Ulf Brüggemann
Humboldt University of Berlin - School of Business and Economics ( email )
Spandauer Str. 1
Berlin, D-10099
Germany
Aditya Kaul
University of Alberta - Department of Finance and Statistical Analysis ( email )
2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
403-492-5027 (Phone)
403-492-3325 (Fax)

Christian Leuz (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-1996 (Phone)
HOME PAGE: http://chicagobooth.edu/fac/christian.leuz
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://www.nber.org
European Corporate Governance Institute (ECGI)
Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Center for Financial Studies (CFS) ( email )
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany
University of Pennsylvania - Wharton Financial Institutions Center
3641 Locust Walk
Philadelphia, PA 19104-6218
United States
CESifo Research Network
Poschinger Str. 5
Munich, DE-81679
Germany
Ingrid M. Werner
The Ohio State University - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-6460 (Phone)
614-292-2418 (Fax)

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