The Twilight Zone: OTC Regulatory Regimes and Market Quality

The Review of Financial Studies, Vol. 31, Issue 3, pp. 898-942, 2018

University of Alberta School of Business Research Paper No. 3126379

Posted: 1 Mar 2018 Last revised: 12 Jun 2018

See all articles by Ulf Brüggemann

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 3 versions of this paper

Date Written: February 19, 2018

Abstract

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

Suggested Citation

Brüggemann, Ulf and Kaul, Aditya and Leuz, Christian and Werner, Ingrid M., The Twilight Zone: OTC Regulatory Regimes and Market Quality (February 19, 2018). The Review of Financial Studies, Vol. 31, Issue 3, pp. 898-942, 2018; University of Alberta School of Business Research Paper No. 3126379. Available at SSRN: https://ssrn.com/abstract=3126379

Ulf Brüggemann (Contact Author)

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

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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