Working Paper: NBER ID: w19358
Authors: Ulf Brggemann; Aditya Kaul; Christian Leuz; Ingrid M. Werner
Abstract: 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: OTC market; regulatory regimes; market quality; liquidity; crash risk
JEL Codes: G12; G14; G32; G33; K22; M13; M4; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stricter regulatory regimes and disclosure requirements (G38) | Higher market quality (liquidity) (L15) |
| Stricter regulatory regimes and disclosure requirements (G38) | Lower crash risk (R48) |
| SEC filings (G24) | Higher liquidity (G19) |
| SEC filings (G24) | Lower crash risk (R48) |
| Firms listed in securities manuals (G24) | Better market liquidity (G19) |
| Firms listed in securities manuals (G24) | Lower crash risk (R48) |
| Stricter merit review laws (K23) | Higher liquidity (G19) |
| Stricter merit review laws (K23) | Crash risk (G01) |
| Tiers in the pink sheets (D49) | Improved liquidity (G19) |
| Tiers in the pink sheets (D49) | Reduced crash risk (R48) |