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Pound wise and penny foolish? OTC stock investor behavior

Author

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  • John R. Nofsinger
  • Abhishek Varma

Abstract

Purpose - – The purpose of this paper is to explore some commonly held beliefs about individuals investing in over-the-counter (OTC) stocks (those traded on Over-the-counter Bulletin Board (OTCBB) and Pink Sheets), a fairly pervasive activity. The authors frame the analysis within the context of direct gambling, aspirational preferences in behavioral portfolios, and private information. Design/methodology/approach - – Contrary to popular perceptions, the modeling of the deliberate act of buying OTC stocks at a discount brokerage house finds that unlike the typical lottery buyers/gamblers, OTC investors are older, wealthier, more experienced at investing, and display greater portfolio diversification than their non-OTC investing counterparts. Findings - – Behavioral portfolio investors (Shefrin and Statman, 2000) invest their money in layers, each of which corresponds to an aspiration or goal. Consistent with sensation seeking and aspirations in behavioral portfolios, OTC investors also display higher trading activity. Penny stocks seem to have different characteristics and trading behavior than other OTC stocks priced over one dollar. Irrespective of the price of OTC stocks, the authors find little evidence of information content in OTC trades. Originality/value - – The paper provides insight into individual investor decision making by empirically exploring the demographic and portfolio characteristics of individuals trading in OTC stocks.

Suggested Citation

  • John R. Nofsinger & Abhishek Varma, 2014. "Pound wise and penny foolish? OTC stock investor behavior," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 6(1), pages 2-25, September.
    • Handle: RePEc:eme:rbfpps:v:6:y:2014:i:1:p:2-25
    DOI: 10.1108/RBF-12-04-02
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    Citations

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    Cited by:

    1. Abrahamson, Martin, 2016. "“Rookies to the stock market: A portrait of new shareholders”," Research in International Business and Finance, Elsevier, vol. 38(C), pages 565-576.
    2. Ryan Davis & Todd Griffith & Brian Roseman & Serhat Yildiz, 2021. "The effects of exchange listing on market quality: Evidence from over‐the‐counter uplistings," The Financial Review, Eastern Finance Association, vol. 56(4), pages 645-669, November.
    3. Davis, Ryan & Griffith, Todd & Van Ness, Bonnie & Van Ness, Robert, 2023. "Modern OTC market structure and liquidity: The tale of three tiers," Journal of Financial Markets, Elsevier, vol. 64(C).
    4. Ananjan Bhattacharyya & Abhijeet Chandra, 2016. "The Cross-section of Expected Returns on Penny Stocks: Are Low-hanging Fruits Not-so Sweet?," Papers 1610.01338, arXiv.org.

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