The Twilight Zone: OTC Regulatory Regimes and Market Quality

Studying a comprehensive sample of stocks from the U.S. OTC market, we show that this market is a large and diverse trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We exploit this institutional richness to show th...

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Bibliographic Details
Published in:The Review of financial studies 2018-03, Vol.31 (3), p.898-942
Main Authors: Brüggemann, Ulf, Kaul, Aditya, Leuz, Christian, Werner, Ingrid M.
Format: Article
Language:English
Subjects:
Compliance
Disclosure
Liquidity
Over the counter sales
SEC regulations
State laws
Studies
Trading
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Summary:Studying a comprehensive sample of stocks from the U.S. OTC market, we show that this market is a large and diverse trading environment with a rich set of regulatory and disclosure regimes, comprising venue rules and state laws beyond SEC regulation. We exploit this institutional richness to show that OTC firms 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 reduces the compliance burden for smaller firms, but it also reduces market quality.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhx102