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Pound wise and penny foolish? OTC stock investor behavior

John R. Nofsinger (Department of Finance and Management Science, College of Business, Washington State University, Pullman, Washington, USA)
Abhishek Varma (Department of Finance, Insurance and Law, College of Business, Illinois State University, Normal, Illinois, USA)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 2 September 2014

1695

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.

Keywords

Acknowledgements

JEL Classifications — G02, G11

Citation

R. Nofsinger, J. and Varma, A. (2014), "Pound wise and penny foolish? OTC stock investor behavior", Review of Behavioral Finance, Vol. 6 No. 1, pp. 2-25. https://doi.org/10.1108/RBF-12-04-02

Publisher

:

Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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