The cross section of over-the-counter equities

We analyze the cross section of stock returns of firms traded on the over-the-counter (OTC) bulletin board and pink sheets markets. We test whether well-known return patterns in stocks listed on the three major United States exchanges generalize to the less liquid stocks in OTC markets. We find that the illiquidity premium is much higher in OTC markets than in listed markets. The return premiums associated with small stocks and value stocks in listed markets also appear in OTC markets, but the premiums for return momentum and idiosyncratic volatility for OTC stocks are weak. There are modest correlations between systematic factors in returns and liquidity in OTC and listed markets, suggesting that these markets are partially segmented.