Mandatory Disclosure and Stock Returns: Evidence from the Over-the-Counter Market

My paper Mandatory Disclosure and Stock Returns: Evidence from the Over-the-Counter Market just came out in the June edition of the Journal of Legal Studies. The paper examines the effects of the extension of the Exchange Act reporting requirements to the over-the-counter (“OTC”) market in 1964. This was the most important extension of reporting requirements in U.S. history–aside from the original securities acts themselves.

The paper documents substantial reductions in stock price volatility in the OTC market as a result of the disclosure requirements. This is consistent with the variance-bound finance literature (including Kenneth West‘s Dividend Innovations and Stock Price Volatility (1988), and Stephen LeRoy‘s and Richard Porter‘s The Present-Value Relation (1981)), which predicts that increased disclosure should reduce firm-specific volatility in the presence of discounting. The paper also documents positive abnormal returns associated with the market anticipating passage of the 1964 amendments. This is consistent with the view that increased transparency should reduce firm value expropriated by insiders, resulting in greater value for shareholders (as described in Andrei Shleifer‘s and Daniel Wolfenzon‘s Investor Protection and Equity Markets (2002)).

The full paper is available here.