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Regulatory spillover effects in OTC markets

Author

Listed:
  • Richard A. Cazier

    (The University of North Texas)

  • Jianning Huang

    (University of Manitoba)

  • Fuzhao Zhou

    (Bowling Green State University)

Abstract

We assess a recent SEC initiative that suspends inactive shell companies from trading in over-the-counter (OTC) stock markets. Critics argue these suspensions do little to reduce fraud in OTC markets because they simply redirect fraudsters’ efforts to other OTC targets. Building on research that finds regulatory intervention among exchange-listed firms often produces positive spillovers, we test whether shell company suspensions are associated with fraud deterrence among other OTC firms operating within the same regulatory jurisdiction as the suspended firm. We find that the SEC’s shell company suspensions are associated with a significant reduction in fraud among peer firms, particularly over short horizons. We find that “reactive” trading suspensions—those that are an explicit response to alleged cases of wrongdoing—also have significant fraud deterrence effects. Overall, our results suggest that regulatory spillover effects previously documented in highly regulated markets also exist in a market characterized by relatively low regulation and disclosure.

Suggested Citation

  • Richard A. Cazier & Jianning Huang & Fuzhao Zhou, 2024. "Regulatory spillover effects in OTC markets," Review of Accounting Studies, Springer, vol. 29(4), pages 3600-3632, December.
    • Handle: RePEc:spr:reaccs:v:29:y:2024:i:4:d:10.1007_s11142-023-09802-8
    DOI: 10.1007/s11142-023-09802-8
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    More about this item

    Keywords

    Over-the-counter markets; Regulation; SEC trading suspensions; Fraud;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K2 - Law and Economics - - Regulation and Business Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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