When Disclosure Pays: Evidence from the Over-The-Counter Markets
Date: 2025-09-25T12:23:45+00:00
Article URL: https://corpgov.law.harvard.edu/2025/09/25/when-disclosure-pays-evidence-from-the-over-the-counter-markets/
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Summary
Robert Bartlett and Colleen Honigsberg analyse the 2020 amendments to SEC Rule 15c2-11, which for the first time required OTC issuers to provide current periodic disclosure in order to retain public quotations. The rule’s compliance deadline was 28 September 2021. The authors study over 3,000 OTC securities that lacked current disclosures when the final rule was announced; about 800 firms began disclosing and kept public quotes, while the remainder were relegated to the Expert Market with restricted quotes.
The paper uses this staggered compliance window as an event setting to measure immediate effects on liquidity and valuation. Main results: non-disclosing firms suffered sharp liquidity declines; firms that disclosed saw immediate liquidity improvements and significant positive abnormal returns (three-day market-adjusted return ~19.5%, six-day ~27.0%). The valuation gains occurred even for issuers with weak or no revenues, implying markets rewarded access and transparency itself, not only better fundamentals.
Key Points
- Amendments to Rule 15c2-11 (effective compliance by 28 Sep 2021) tied public quotation to current periodic disclosure for OTC securities.
- Study covers 3,000+ OTC issuers without current disclosures at announcement; ~800 disclosed to keep quotes, others lost public quotes and moved to the Expert Market.
- Non-disclosing firms experienced immediate collapses in liquidity: market makers fell (≈6 to <3), two-sided quotes dropped (≈90% to <15%), and trading costs rose sharply.
- Disclosing firms saw immediate liquidity improvements: more market-maker activity and narrower quoted spreads following their first disclosure.
- Stock prices rose materially on disclosure: 3-day and 6-day market-adjusted returns of ~19.5% and ~27.0% respectively, even for firms with poor financials.
- The rule effectively split the OTC market into a transparent, publicly accessible tier and an opaque, thinly traded Expert Market, with governance and investor-protection implications.
Context and Relevance
The paper reframes the debate about the shrinking count of “public” US firms by showing that many issuers trade OTC without regular disclosure. By making disclosure a condition of public quotation, the SEC eliminated a long-standing anomaly and revealed the tangible costs and benefits of mandatory reporting in the OTC space. Results matter to regulators, exchanges, boards and investors interested in market structure, information asymmetry, and corporate governance. The segmentation created by the rule changes shifts power to insiders who decide whether a firm sits in the transparent tier—raising potential governance concerns.
Why should I read this?
Short version: if you care about market quality, investor protection or the value of transparency, this paper shows that the choice to disclose (or not) has immediate, measurable consequences for liquidity and share prices. It’s practical, not theoretical—liquidity evaporates without a public quote, and prices jump when firms opt in. Read it to see hard numbers on what disclosure actually buys you in the OTC market.
Author’s take
Punchy and important: the study supplies clean, event-driven evidence that forcing the bundle of disclosure plus public quotation reshapes markets. Regulators get a clear signal that disclosure delivers market benefits; boards and investors get a clear view of the trade-offs. This is essential reading for policy-makers and governance professionals.
