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

Posted: 15 Apr 2004

See all articles by Brian J. Bushee

Brian J. Bushee

University of Pennsylvania - The Wharton School

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Leibniz Institute SAFE; CESifo Research Network; Center for Financial Studies (CFS)

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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 Classification: G18, G38, K22, G39, M41, M45, G12, G14

Suggested Citation

Bushee, Brian J. and Leuz, Christian, Economic Consequences of Sec Disclosure Regulation: Evidence from the OTC Bulletin Board. Journal of Accounting & Economics, Vol. 39, No. 2, 2005, Available at SSRN: https://ssrn.com/abstract=530963

Brian J. Bushee

University of Pennsylvania - The Wharton School ( email )

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Christian Leuz (Contact Author)

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