#02-24-B
"Economic Consequences of SEC Disclosure Regulation"
Brian J. Bushee and Christian Leuz, February 2003

Abstract: This paper examines the economic consequences of SEC disclosure regulation. We exploit a recent regulatory change mandating firms on the OTC Bulletin Board to comply with the reporting requirements under the Securities Exchange Act of 1934. This change substantially increases the amount and enforcement of required disclosures for firms that previously did not file with the SEC. In this unique setting, we document that the imposition of SEC disclosure requirements and enforcement results in significant costs for smaller firms, which are essentially forced off the OTCBB. However, SEC disclosure regulation also has significant benefits. Firms already filing with the SEC prior to the rule change experience positive stock returns and permanent increases in market liquidity. This evidence is consistent with positive externalities from disclosure regulation. Moreover, newly compliant firms exhibit significant increases in market liquidity upon compliance consistent with the notion that commitment to higher-quality disclosures increases market liquidity.

JEL classification: G18, G38, K22, G39, M44, G14

Key Words: Mandatory disclosure, Enforcement, Externalities, Over-the-counter market, Liquidity, Listing choices, Eligibility rule

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