The Twilight Zone: OTC Regulatory Regimes and Market Quality

Ulf Brüggemann, Aditya Kaul, Christian Leuz and Ingrid M. Werner

No 19358, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G12 G14 G32 G33 K22 M13 M4 M41 (search for similar items in EconPapers)
Date: 2013-08
New Economics Papers: this item is included in nep-mst
Note: AP CF LE
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Published as Ulf Brüggemann & Aditya Kaul & Christian Leuz & Ingrid M. Werner, 2018. "The Twilight Zone: OTC Regulatory Regimes and Market Quality," The Review of Financial Studies, vol 31(3), pages 898-942.

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Journal Article: The Twilight Zone: OTC Regulatory Regimes and Market Quality (2018)
Working Paper: The Twilight Zone: OTC Regulatory Regimes and Market Quality (2013)
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