Mereja.Forum

[EmiliePittman00]

Over one thousand stocks trade in over-the-counter (OTC) markets. Unlike the listed NYSE, Nasdaq, and AMEX markets, OTC stock markets are opaque, with little or no disclosure and news dissemination, illiquid, and dominated by retail investors. These differences in the information environment, market structure, and clientele could cause differences in the expected returns of OTC stocks and listed stocks. Indeed, we find that the return premium for illiquid stocks is much higher in OTC markets than in listed markets; and it is highest in OTC stocks with the lowest disclosure. The return premiums for small stocks and value stocks in listed markets also appear in OTC markets, but the premiums for return momentum and idiosyncratic volatility are small in OTC markets. These findings shed light on theories of the origins of these return premiums.