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Asset Pricing in the Dark: The Cross-Section of OTC Stocks

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  • Andrew Ang
  • Assaf A. Shtauber
  • Paul C. Tetlock

Abstract

Over-the-counter (OTC) stocks are far less liquid, disclose less information, and exhibit lower institutional holdings than do listed stocks. We exploit these different market conditions to test theories of cross-sectional return premiums. Compared with premiums in listed markets, the OTC illiquidity premium is several times higher, the size, value, and volatility premiums are similar, and the momentum premium is three times lower. The OTC illiquidity, size, value, and volatility premiums are largest among stocks held predominantly by retail investors and those not disclosing financial information. Theories of differences in investors' opinions and limits on short sales help explain these return premiums. The Authors 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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  • Andrew Ang & Assaf A. Shtauber & Paul C. Tetlock, 2013. "Asset Pricing in the Dark: The Cross-Section of OTC Stocks," The Review of Financial Studies, Society for Financial Studies, vol. 26(12), pages 2985-3028.
    • Handle: RePEc:oup:rfinst:v:26:y:2013:i:12:p:2985-3028
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    File URL: http://hdl.handle.net/10.1093/rfs/hht053
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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