Some empirical evidence on stock returns and security credit regulation in the OTC equity market

Abstract

This paper studies price reactions of OTC stocks that are added to and deleted from the Federal Reserve Board's Official List of OTC Margin Stocks. We interpret any price reactions as economic effects related to the Fed's security credit regulatory activities under the 1969 Amendment to the 1934 Securities Exchange Act. We test for three effects: (1) Fed endorsement, (2) credit, and (3) asymmetric information. Using both weekly and daily data we find strong positive stock price reactions when OTC stocks are added to the Fed's list. No major effects are discernible when stocks are removed from the Fed's list. We interpret these findings to be consistent with a credit convenience effect.