When Disclosure Pays: Evidence from the Over-The-Counter Markets
Summary
This post summarises a new paper by Robert Bartlett and Colleen Honigsberg that evaluates the 2020–21 amendments to SEC Rule 15c2-11 and their effects on over-the-counter (OTC) trading. The rule tied public quotations for OTC securities to current public disclosures for the first time, forcing non-disclosing firms to choose between beginning periodic disclosure (to retain public quotes) or losing public quotation and being relegated to an Expert Market.
The authors study roughly 3,000 OTC securities that lacked current disclosures at the rule announcement: about 800 firms began disclosing by the 28 September 2021 deadline while the rest lost their public quotes. Using an event-study approach, they estimate immediate changes in liquidity and valuation following firms’ disclosure choices.
Key Points
- The Rule 15c2-11 amendments (adopted 16 September 2020; compliance deadline 28 September 2021) made current disclosure a condition for maintaining public quotations in the OTC market.
- Non-disclosing firms that lost public quotes experienced a collapse in liquidity: average market makers fell from nearly six to fewer than three and two-sided quotes dropped from ~90% to under 15%; trading costs rose sharply.
- Firms that began disclosing saw immediate liquidity improvements: more market-makers and narrower quoted spreads were observed upon first disclosure.
- Disclosure produced large valuation gains: three-day and six-day market-adjusted returns of about 19.5% and 27.0% respectively, even for firms with weak or no revenues — indicating the market rewarded the commitment to transparency, not only the reported fundamentals.
- The rule effectively split the OTC market into a transparent tier and an opaque, thinly traded Expert Market, raising governance concerns because insiders decide whether a firm becomes transparent or remains opaque.
Context and relevance
Policymakers worry about the decline in U.S. listed firms, but debates often ignore thousands of issuers trading OTC. By bundling public trading with mandatory disclosure, the SEC restored the usual exchange-like linkage between quotation and reporting. The paper provides fresh empirical evidence on the trade-off firms face: disclosure carries compliance and strategic costs, but it also yields measurable liquidity and valuation benefits for shareholders. The findings matter for regulators, investors and corporate governance debates around transparency, market quality and the incentives firms face when choosing to be public.
Why should I read this?
Short and blunt: if you care about market structure, investor protection, or why tiny stocks either trade actively or disappear into darkness, this is worth five minutes. The paper shows a simple policy tweak — forcing disclosure to keep a public quote — had big, immediate payoffs for liquidity and prices. We’ve done the reading so you don’t have to.
Author style
Punchy: this is essential reading for regulators, exchanges, institutional investors and boards. The results aren’t subtle — disclosure materially improves marketability and valuation. If you work on securities regulation, corporate governance or market microstructure, this paper should influence how you think about mandatory reporting and the costs firms face when choosing between transparency and opacity.
