When Disclosure Pays: Evidence from the Over-The-Counter Markets
Summary
Robert Bartlett and Colleen Honigsberg (Stanford Law School) examine the effects of the SEC’s 2020 amendments to Rule 15c2-11, which for the first time required OTC issuers to provide current periodic disclosures as a condition for retaining publicly visible broker-dealer quotations. The rule created a binary choice for previously non-disclosing OTC firms: disclose by the September 28, 2021 compliance deadline to keep public quotes, or stop providing current disclosures and be relegated to the Expert Market with severely limited, non-public quotations.
The authors track roughly 3,000 OTC securities that lacked current disclosures when the rule was announced. About 800 firms started disclosing before the deadline and kept public quotes; the remainder lost public quotation visibility. Using an event-study approach around firms’ disclosure decisions, the paper measures immediate changes in liquidity and valuation and draws implications for mandatory disclosure policy and OTC market structure.
Key Points
- Rule change tied public trading to mandatory, periodic disclosure for OTC issuers for the first time.
- Securities that lost public quotation experienced dramatic liquidity declines: market makers fell from nearly six to fewer than three on average, and two-sided quotes dropped from ~90% to under 15%.
- Round-trip trading costs rose substantially for firms relegated to the Expert Market.
- Firms that began disclosing saw immediate liquidity improvements: more market-maker activity and narrower quoted spreads.
- Stock prices jumped strongly when firms committed to disclosure — three-day and six-day market-adjusted returns of 19.5% and 27.0%, respectively — even for firms with weak or no revenues.
- The rule effectively split the OTC into a transparent, publicly accessible tier and an opaque, thinly traded Expert Market, with important governance and investor-protection implications.
Context and Relevance
This paper speaks directly to debates about the shrinking universe of publicly traded firms and the trade-offs of mandatory disclosure. By forcing a choice between public trading and periodic reporting, the Rule 15c2-11 amendments reveal the market value of transparency: liquidity and valuation benefits accrue quickly to firms that disclose. At the same time, the steep costs borne by non-disclosing firms show why some issuers may rationally opt for opacity. The findings are highly relevant for regulators, exchanges, corporate boards and investors thinking about disclosure policy, market structure and the incentives insiders face when deciding whether to subject a company to public reporting obligations.
Why should I read this?
Short version: if you care about market structure, investor protection or why some companies stay out of the full public reporting world, this is worth your five-minute skim. The authors have a clean quasi-experiment — a hard deadline that split firms into “disclose” or “Expert Market” — and the results are striking: disclosure buys you real liquidity and price gains, fast. It’s particularly useful if you work in regulation, corporate governance, or trade OTC securities and want evidence on what transparency actually delivers.
