Regulation, Disclosure and Market Liquidity (an Examination of Foreign Issuers in Regulated Versus Less-Regulated Us Equity Markets)

Abstract

In this study, we examine the association between regulation and the disclosure practices and equity market liquidity of 156 non-U.S. firms with equity traded in the U.S. during calendar years 1994 and 1995. Of these firms, 68 have equities traded on the OTC Bulletin Board (OTCBB) and are exempt from filing annual reports on Form 20-F with the SEC. The remaining 88 firms are SEC registrants traded on the New York Stock Exchange (NYSE) or NASDAQ.We find that although voluntary compliance with Form 20-F disclosure requirements is low, OTCBB firms provide other types of disclosure (especially financial forecasts) to a greater extent than the exchange firms. This result holds even after controlling for other determinants of cross- sectional variation in disclosure levels identified by prior research. This finding is consistent with the joint hypothesis that OTCBB firms have incentives to disclose information, but choose to provide less costly disclosure types than those required by the SEC. However, firms self- selecting on to the OTCBB market to avoid stringent SEC disclosure requirements bear the cost of much less liquidity and a smaller US analyst following even though they provide a higher level of non-Form 20-F disclosure. Finally, a within market examination of the association between market liquidity and levels of Form 20-F and non-Form 20-F disclosures suggests that=A0 information of the type required by the SEC enhances market liquidity. The results of this study are expected to be relevant for regulators, stock exchanges, financial statement users, corporate managers, and researchers.

JEL Classification: M41, M45, F39, G18, G29