The Effect of Disclosure Regulation on M&A Activity: Evidence from the Over-the-Counter Market

This paper tests the impact of mandated disclosure regulation on merger & acquisition (M&A) activity by studying the extension of the U.S. mandated disclosure regime to companies trading on the over-the-counter (OTC) securities market, the Securities Acts Amendments of 1964. The Securities Acts Amendments are an excellent test case of the effects on M&A activity due to (i) the large number of affected OTC companies, (ii) the typical paucity of disclosure among OTC companies before the passage of the legislation, (iii) the absence of any severe macroeconomic shocks during the test period and (iv) the natural control group provided by the non-OTC companies not affected by the Securities Acts Amendments. The paper tests the impact of mandated disclosure on M&A activity among OTC companies during the 1955-75 period in two ways, regression analysis and comparison with M&A activity among non-OTC companies. Both tests in the paper strongly support the views of several academics and practitioners that mandated disclosure provides useful information to the market and that this information encourages higher levels of M&A activity.