The Twilight Zone: OTC Regulatory Regimes and Market Quality
The Review of Financial Studies, Vol. 31, Issue 3, pp. 898-942, 2018
Posted: 1 Mar 2018 Last revised: 12 Jun 2018
Date Written: February 19, 2018
Studying a comprehensive sample of stocks from the U.S. OTC market, we show that this market is a large and diverse trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We exploit this institutional richness to show that OTC firms 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 reduces the compliance burden for smaller firms, but it 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
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