Would Improved Information Environment of a Less Regulated OTC Market Benefit Blue-chip Foreign Firms? Evidence from the OTCQX International Market

Abstract

This study examines whether improved information environment in the OTCQX International market (hereafter QX market) benefits blue-chip foreign private issuers (FPIs). We find that around 600 FPIs traded their stocks in the QX market during 2007-2016, and they are financially better than their home-country counterparts. We also find approximately 6% abnormal return around the cross-listing days. Moreover, FPIs with higher financial reporting transparency (i.e., lower earnings smoothness and preparing financial statements in accordance with International Financial Reporting Standards) experience more pronounced abnormal returns and liquidity improvement around the cross-listing days. Further analysis shows that market premium of cross listing on the QX market is not attributed to the bonding effect. Our results highlight the importance of information environment of a less regulated OTC market in benefiting large and established FPIs, which should be of interest to market regulators, investors, and foreign firms that intend to access less regulated U.S. markets.

Keywords: OTC; OTCQX; Cross-listing; Foreign Private Issuers; Earnings Transparency; IFRS

JEL Classification: G14;G15;M41