The Impact on Stock Returns and Liquidity for OTC Equity Issues Added to the List of Marginable OTC Stocks

Abstract

This paper studies the impact of being placed on the List of Marginable Over-the-Counter (OTC) Stocks for OTC stocks that were not, at the same time, placed on the National Association of Security Dealers' Automated Quotations National Market System. As such, the study provides relatively unconfounded evidence on the effects brought about by changes in the regulatory status of these stocks. The results indicate that the event of being added to the List of Marginable OTC Stocks provides positive excess returns. The benefit appears to be greater for smaller market value stocks than for larger market value stocks. This result primarily supports a Federal Reserve endorsement effect as larger market value stocks may already have a larger investor following relative to the smaller, relatively unknown issues. This finding supports results from other studies, dealing with listing on exchanges—that all stocks do not benefit to the same degree from such an event. Finally, stock liquidity, as measured both by average relative turnover and average relative bid-ask spread, does not appear to be significantly affected based on a comparison of 60-day trading periods before and after the placement of the stocks on the marginability list. Thus, it appears that the Federal Reserve does not induce speculative activity in these stocks.