The Twilight Zone: OTC Regulatory Regimes and Market Quality

100 Pages Posted: 24 Aug 2013 Last revised: 24 Nov 2021

See all articles by Ulf Brüggemann

Ulf Brüggemann

Humboldt University of Berlin - School of Business and Economics; TRR 266 Accounting for Transparency

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); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); 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: August 2013

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.

Suggested Citation

Brüggemann, Ulf and Kaul, Aditya and Leuz, Christian and Werner, Ingrid M., The Twilight Zone: OTC Regulatory Regimes and Market Quality (August 2013). NBER Working Paper No. w19358, Available at SSRN: https://ssrn.com/abstract=2315442

Ulf Brüggemann (Contact Author)

Humboldt University of Berlin - School of Business and Economics ( email )

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TRR 266 Accounting for Transparency ( email )

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Aditya Kaul

University of Alberta - Department of Finance and Statistical Analysis ( email )

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Christian Leuz

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://faculty.chicagobooth.edu/christian.leuz/

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Centre for Economic Policy Research (CEPR) ( email )

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HOME PAGE: http://www.ecgi.org

Center for Financial Studies (CFS) ( email )

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Ingrid M. Werner

The Ohio State University - Fisher College of Business ( email )

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Columbus, OH 43210-1144
United States
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