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

Abstract

Mandatory disclosure requirements placed on publicly traded firms constitute the core of U.S. securities regulation. Despite their importance, few empirical studies have been done on the impact of mandatory disclosure requirements on the capital markets. Using a unique database created for this study, this paper examines the impact of the 1964 imposition of mandatory disclosure requirements on the over‐the‐counter (OTC) market in terms of volatility and stock returns. The effect of the 1964 regulatory change has never been examined prior to this paper, despite its being the only fundamental change in disclosure regulation since the original 1930s securities acts. This study finds that mandatory disclosure is associated with both a dramatic reduction in the volatility of OTC stock returns and with OTC stocks enjoying positive abnormal returns.