UM Today | Asper School of Business

November 10, 2023 —

Asper Business School Assistant Professor of Finance Jianing Huang published a paper Review of Mathematical Studies. According to the Financial Times 50 magazine, Evaluation It publishes exceptional works that meet their high academic rigor, impact and diversity. The paper, co-authored with Richard A. Cazier and Fuzhao Zhou, examines how regulation affects the spread of fraud in over-the-counter (OTC) stock markets.

While most stocks are traded on major stock exchanges such as the Nasdaq or the New York Stock Exchange, OTC companies are not listed on these exchanges. Even outside of the major stock exchanges, the OTC market is vast, with a daily dollar volume of $1.5 billion as of November 7, 2023.

Huang explains why these massive OTC markets are particularly prone to fraud.

“The information environment of OTC markets is very different from that of publicly listed companies. Much of the trading and stock information is not readily disclosed by OTC companies. This makes it difficult for investors to do their analysis before buying, creating a potential opportunity for fraudsters,” says Huang.

The stock prices of many OTC companies also fluctuate more than the stocks themselves. Combined, OTC stocks’ exposure to large price volatility and lack of firm transparency make OTC companies ripe for fraud and pose additional challenges for regulators, researchers, and retail investors.

In their paper, Huang and co-authors assessed the impact of Operation Shell-Express, launched by the Securities and Exchange Commission (SEC) in 2012 to reduce OTC market manipulation. The initiative targets seemingly dormant companies by proactively suspending their operations until they can prove their legitimacy.

Although others have criticized Operation Shell-Expel and are skeptical of its effectiveness, Huang and his co-authors estimate that the initiative has been successful in reducing fraud overall.

“First, we looked at the impact on banned organizations,” he explains. “We then looked at other firms headquartered in the same state as the banned firms. We found that when suspect firms were proactively banned, there was an overall reduction in fraud at the state level.”

In other words, a firm’s regulation “flows” to reduce fraud among firms within the same state.

Huang, who has been at Asper Business School for over a year, expressed his appreciation for the school’s research support.

“Asper has been very helpful with funding and resources for new faculty members, allowing me to pursue my research. The Stu Clark Distinguished Speaker Series has been particularly impressive, and I have been able to invite distinguished academics, including Dr. Andrew Stark, Emeritus Professor, Alliance Manchester Business School, University of Manchester and Dr. Waymond Rogers, Professor, Woody L. College of Business, University of Texas at El Paso, to share their work and meet with Asper researchers.

The Stu Clark Distinguished Speaker Series is supported by a generous gift from Asper Business School alumnus Stu Clark [BComm/76]. It invites distinguished researchers from outside UM to give a series of research seminars and engage with faculty and graduate research students. Upcoming presenters will include Associate Professor Jean-Philippe “JP” Vergne, who will discuss information distribution and decision-making in decentralized platforms such as the “Metaverse.”

Asper’s business school supports research like Huang’s, which makes an impact.

His research keeps up with the growing population of retail investors—who are entering the markets earlier and participating more than ever before. Through its work, it contributes to a better market environment, enabling individual investors to make informed investments in the OTC market and policy makers to maintain a balance between preventing fraud and promoting growth.

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