Economic Consequences of SEC Disclosure Regulation: Evidence from the OTC Bulletin Board

Abstract:     
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 Classifications: G18, G38, K22, G39, M41, M45, G12, G14

Accepted Paper Series