A Comparative Study On The Development Of OTC Market In China And United States

The OTC Equity Market(hereinafter referred to as "OTC Market")is a critical component of a country's multi-level capital market system.The main function of the OTC market is to serve the direct financing needs of small and medium-sized enterprises,technology and innovative enterprises,as well as regional economies.The OTC market is profoundly important for developing infrastructure financing,structural industrial financing,regional financing and the system of functions in a multi-level capital market.The deepening reform and the accelerated growth of the OTC market,as well as the establishment of a multi-level capital market system with well-rounded functions and coverage,is one of the major issues in reforming and developing the national financial system in China after the 19th CPC national congress.Nevertheless,OTC market has not received adequate attention from academic studies.In particular,the literature lacks theoretical framework and empirical analyses on the development and function construction of OTC markets.Therefore,this paper focuses on the comparative analyses on the development of OTC markets in China and United States.Specifically,this paper compares the structural functions through empirical analyses and thereby summarizes the development characteristics,functional attributes and differences of OTC markets in China and US.It further examines the moderating effect of the institutional elements on the development of OTC markets in China and US and thereby concludes on the implications for the development of OTC market in China.This paper follows the methodologies of a comparative study and generates generic insights about the development of OTC markets based on the international comparative experiences and practices of OTC market development.It summarizes the motivations,processes,contingencies as well as the outcomes of OTC market development and further focuses on the systematic comparative analyses on the OTC market development in China and US.First of all.US and China differ in their status quo,economic development stages and industrial structures.Nevertheless,both countries have economic structures as great powers,which is evidenced by their fully and vertically integration in value chains and multiple regional economies.The scale of their OTC markets is close and hence makes them comparable.Second,China and US differ significantly in their institutional elements,which enables the examination of the moderating effect of institutional environment on OTC market.Therefore,this paper compares the development and characteristics of OTC markets in both countries based on the data of listed companies in their OTC markets.In particular,this paper provides descriptive analyses as well as econometric examination on the functional construction of OTC markets and the moderation effect of institutional elements and thereby concludes on the comparative analyses on the development of OTC markets in US and China.This paper finds that China and US have commonalities as well as differences in the motivation and institutional design of their OTC markets.One driver for the development of US OTC market is the stratification need of listed companies while China's OTC market is partially driven by the need for liquidity.Based on the empirical analyses,this paper finds that first,China's OTC markets has caught up fast with US OTC market in scale,however,still remains significantly different in the vitality of transactions,the size of listed firms and structure.Second,the average revenue and market cap of Chinese firms listed in OTC markets are significantly smaller than those of US firms listed in OTC markets.The level of regional and industry concentration is higher in China's OTC market than those in US OTC markets.Third,this paper finds that OTC markets in US and China have commonalities and differences in their functions.Both markets have the functions of discovering information,promoting technological innovation and enhancing firm value.However,the markets differ in their functions of de-risking and helping firms with getting other financial resources.Meanwhile,the paper does not find significant positive effect of OTC markets on corporate governance of firms.This paper suggests that the differences in the functions of OTC markets in US and China originates from the institutional differences between these two countries and further theorizes the moderating effect of institutional environment on the functions of OTC markets.Based on the above results,this paper provides suggestions for further developing OTC markets in China.Specifically,it suggests that,while keeping perfecting the rules,China should explore new stratification standard besides financial performance and scale and experiment new OTC market practices in regions with greater institutional environment support so as to maximize the value of existing OTC markets.In the long run,China should improve institutional environment,such as investing more in judicial resources,further marketizing the economy,reducing the intervention of the market by the government,promoting risk culture in the market,perfecting credit system and establishing the interaction and association between OTC markets and other financial institutions(such as banks and capital markets)and thereby better unleash the potential of its OTC markets.