The Twilight Zone: OTC Regulatory Regimes and Market Quality

102 Pages Posted: 6 Jul 2013 Last revised: 21 Nov 2016

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

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2016

Abstract

We analyze a comprehensive sample of more than 10,000 U.S. OTC stocks. We provide much needed descriptive evidence on this market and show that the OTC market is a large, diverse, and dynamic trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We also exploit the institutional richness of the OTC market and analyze two key dimensions of market quality, liquidity and crash risk, across firms and regulatory regimes. We find that OTC firms that are subject to stricter regulatory regimes and disclosure requirements have higher market quality (higher liquidity and lower crash risk). Our analysis points to an important trade-off in regulating the OTC market and protecting investors: Lowering regulatory requirements (e.g., for disclosure) reduces the compliance burden for smaller firms, but also reduces market quality.

Keywords: Securities Regulation, Disclosure, Liquidity, Crash Risk, Blue Sky Laws, Pink Sheets, Bulletin Board, JOBS Act

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

Suggested Citation

Brüggemann, Ulf and Kaul, Aditya and Leuz, Christian and Werner, Ingrid M., The Twilight Zone: OTC Regulatory Regimes and Market Quality (November 1, 2016). IGM Working Paper #95; Fisher College of Business Working Paper No. 2013-03-09; Charles A. Dice Center Working Paper No. 2013-09; ECGI - Law Working Paper No. 224/2013. Available at SSRN: https://ssrn.com/abstract=2290492 or http://dx.doi.org/10.2139/ssrn.2290492

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://faculty.chicagobooth.edu/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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