Economic Consequences of SEC Disclosure Regulation: Evidence from the OTC Bulletin Board
Brian J. Bushee
University of Pennsylvania - The Wharton School
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network
Journal of Accounting & Economics, Vol. 39, No. 2, 2005
This paper examines the economic consequences of a recent regulatory change mandating OTC Bulletin Board firms to comply with the reporting requirements under the 1934 Securities Exchange Act. This change substantially increases the required disclosures for firms that previously did not file with the SEC. We document that the imposition of SEC disclosure requirements results in significant costs for smaller firms, essentially forcing them off the OTCBB. However, SEC disclosure regulation also has significant benefits. Firms filing with the SEC prior to the change experience positive stock returns and permanent increases in liquidity, consistent with positive externalities from disclosure regulation. Moreover, newly compliant firms exhibit significant increases in liquidity upon compliance consistent with the notion that disclosure reduces information asymmetry and improves market liquidity.
Keywords: Mandatory disclosure, Enforcement, Externalities, Over-the-counter market, Liquidity, Listing choices, Eligibility rule
JEL Classification: G18, G38, K22, G39, M41, M45, G12, G14
Date posted: April 15, 2004
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