Economic Consequences of SEC Disclosure Regulation

Abstract

of Mergent, and Gerry Cooke of Datastream International for their assistance with institutional details and data issues. Finally, we thank Brian Lempel, Darwin Rodriguez, and Richard Clattenburg for their research assistance. Economic Consequences of SEC Disclosure Regulation: The Case of the OTC Bulletin Board This paper examines the economic consequences of SEC disclosure requirements using a recent regulatory change in the OTC Bulletin Board. Starting in 1999, all firms trading on the OTCBB have to comply with the “eligibility rule ” requiring firms to provide SEC disclosure filings. For firms that previously did not file with the SEC, this rule is similar to the introduction of the Securities Exchange Act of 1934. In this unique setting, we document both significant costs and benefits to firms from the imposition of SEC disclosure requirements in terms of firms ’ listing choices, shifts in market liquidity and stock returns. Specifically, newly compliant firms experience permanent increases in liquidity and positive returns, whereas the reverse is true for noncompliant firms forced off the OTCBB. Using firms already filing with the SEC prior to the rule change, we provide evidence consistent with the existence of positive externalities from SEC disclosure regulation. JEL classification: