Charles A. Dice Center Working Paper No. 2013-09
102 Pages Posted: 6 Jul 2013 Last revised: 21 Nov 2016
Date Written: November 1, 2016
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: 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