Pound Wise and Penny Foolish? OTC Stock Investor Behavior

Review of Behavioral Finance, 6(1), 2014.

Posted: 15 Jan 2010 Last revised: 6 Aug 2014

Abhishek Varma

Illinois State University

John R. Nofsinger

University of Alaska Anchorage

Date Written: April 28, 2012

Abstract

We explore some commonly held beliefs about individuals investing in OTC stocks (those traded on OTCBB & Pink Sheets), a fairly pervasive activity. We frame our analysis within the context of direct gambling, aspirational preferences in behavioral portfolios, and private information. Contrary to popular perceptions, our modeling of the deliberate act of buying OTC stocks at a discount brokerage house finds that unlike the typical lottery buyers/gamblers, OTC investors are older, wealthier, more experienced at investing, and display greater portfolio diversification than their non-OTC investing counterparts. Behavioral portfolio investors (Shefrin and Statman, 2000) invest their money in layers, each of which corresponds to an aspiration or goal. Consistent with sensation seeking and aspirations in behavioral portfolios, OTC investors also display higher trading activity. Penny stocks seem to have different characteristics and trading behavior than other OTC stocks priced over one dollar. Trading in penny stocks is positively related to investor preference for lottery like stocks. Irrespective of the price of OTC stocks, we find little evidence of information content in OTC trades.

Keywords: Individual Investors, Investment Decisions, Behavioral Finance, Gambling

JEL Classification: G02, G11

Suggested Citation

Varma, Abhishek and Nofsinger, John R., Pound Wise and Penny Foolish? OTC Stock Investor Behavior (April 28, 2012). Review of Behavioral Finance, 6(1), 2014.. Available at SSRN: https://ssrn.com/abstract=1537256 or http://dx.doi.org/10.2139/ssrn.1537256

Abhishek Varma

Illinois State University ( email )

Normal, IL 61790
United States
309-438-5658 (Phone)

John R. Nofsinger (Contact Author)

University of Alaska Anchorage ( email )

3211 Providence Drive
Anchorage, AK 99508
United States

HOME PAGE: http://faculty.cbpp.uaa.alaska.edu/jnofsinger/

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