Working Paper: NBER ID: w19309
Authors: Andrew Ang; Assaf A. Shtauber; Paul C. Tetlock
Abstract: Over-the-counter (OTC) stocks are far less liquid, disclose less information, and exhibit lower institutional holdings than listed stocks. We exploit these different market conditions to test theories of cross-sectional return premiums. Compared to premiums in listed markets, the OTC illiquidity premium is several times higher, the size, value, and volatility premiums are similar, and the momentum premium is three times lower. The OTC illiquidity, size, value, and volatility premiums are largest among stocks held predominantly by retail investors and those not disclosing financial information. Theories of differences in investors' opinions and limits on short sales help explain these return premiums.
Keywords: No keywords provided
JEL Codes: G10; G12; G14; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| OTC illiquidity premium (G19) | return premiums (G22) |
| investor behavior (G41) | pricing of OTC stocks (G10) |
| limits to arbitrage (G19) | OTC illiquidity premium (G19) |
| momentum premium in OTC markets (G19) | momentum premium in listed markets (G19) |
| liquidity (E41) | return premiums (G22) |
| OTC market (G19) | negative returns (G12) |
| size (L25) | return premiums (G22) |
| value (D46) | return premiums (G22) |
| volatility (E32) | return premiums (G22) |