Private Intermediary Innovation and Market Liquidity: Evidence from the Pink Sheets Tiers of the OTC Market

56 Pages Posted: 14 Sep 2011 Last revised: 8 Apr 2014

John (Xuefeng) Jiang

Michigan State University

Kathy R. Petroni

Michigan State University - Eli Broad College of Business and Eli Broad Graduate School of Management

Isabel Yanyan Wang

Michigan State University

Date Written: April 4, 2014

Abstract

In 2007, OTC Markets Group assigned each Pink Sheets company to a disclosure tier and on its websites affixed a colorful graphic to its stock symbol signifying the company’s public disclosure level. This unique innovation allows us to investigate the impact of increased salience of disclosure practices on liquidity. Using a difference-in-difference design, we find evidence that firms that are categorized and labeled as Current Information experience an increase in liquidity while firms categorized and labeled as No Information experience a decrease in liquidity, both relative to other OTC firms. This suggests that increases in the salience of disclosure practices via assignment to disclosure tiers with labels and graphics affects investors’ attention, leading to changes in trading behavior that ultimately translate into liquidity changes in the Pink Sheets market. We also provide evidence that some investors anticipated the resulting liquidity changes because stock returns around a key event date leading up to the release of the disclosure tiers are positively associated with subsequent liquidity changes.

Keywords: Pink Sheets, OTC Bulletin Board, Behavioral Finance, Investor Attention, Liquidity

JEL Classification: G12, G14, N20

Suggested Citation

Jiang, John (Xuefeng) and Petroni, Kathy R. and Wang, Isabel Yanyan, Private Intermediary Innovation and Market Liquidity: Evidence from the Pink Sheets Tiers of the OTC Market (April 4, 2014). Available at SSRN: https://ssrn.com/abstract=1927295 or http://dx.doi.org/10.2139/ssrn.1927295

John (Xuefeng) Jiang (Contact Author)

Michigan State University ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
517-432-3031 (Phone)
517-432-1101 (Fax)

HOME PAGE: http://www.msu.edu/~jiangj/

Kathy Ruby Petroni

Michigan State University - Eli Broad College of Business and Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States
517-432-2924 (Phone)
517-432-1101 (Fax)

Isabel Wang

Michigan State University ( email )

N233 Business Complex
Broad School of Business
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.msu.edu/~wangyany/

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