When Audit is a Choice: Disclosure, Verification, and Capital Formation in the U.S. OTC Markets

Abstract

We study how disclosure and audit choices relate to capital formation in a contemporary U.S. public equity market where issuers retain meaningful discretion over both aspects. Issuers reporting under the Alternative Reporting Standard (ARS) in the over-the-counter (OTC) Pink Current tier must file quarterly and annual financial statements, but they retain discretion over voluntary filings beyond this baseline and over whether their annual financial statements are audited or accompanied by an outside attorney’s letter. Using transaction-level equity issuance data that enables us to separate outsider issuance from insider issuance, we document three patterns across 748 ARS issuers during 2021-2024. First, issuers filing more disclosures are more likely to raise equity and raise larger amounts. Second, this association is concentrated in outsider issuance and near zero for insider issuance. Third, an independent audit reinforces the disclosure–issuance relation, primarily by increasing the likelihood that outside investors participate. Our findings suggest that even outside the SEC’s reporting framework, disclosure and auditing play an important role in capital formation in public capital markets.

Keywords: Over-the-Counter (OTC) Market, Disclosure, Verification, Capital Formation, Alternative Reporting Standards (ARS)