Over-the-Counter (OTC) Market Companies and Auditor Choice

• In Event: Audit Firm and Opinions

Abstract

The purpose of this paper is to examine how the over-the-counter (OTC) firms select the auditors. We investigate whether the regulation requirements affect the auditor choice for the OTC firms. Following prior studies on auditor choice, we expect that client firm size, complexity and risk affect auditor choice (Carcello et al. 2002; Ho and Kang 2013). Over‐the‐counter (OTC) stocks are far less liquid, disclose less information, and exhibit lower institutional holdings than listed stocks. After June 2000, firms listed on the OTCBB but not the Pink Sheet must have at least 100 shareholders, file annual reports, hold annual shareholder meetings, and meet other governance requirements the economic consequences of a regulatory change mandating OTCBB firms to comply with reporting requirements under the 1934 Securities Exchange Act. This change substantially increases mandated disclosures for firms previously not filing with the SEC. The imposition of disclosure requirements results in significant costs for smaller firms, forcing them off the OTCBB. SEC regulation also has significant benefits. Firms previously filing with the SEC experience positive stock returns and permanent increases in liquidity, suggesting positive externalities from disclosure regulation. Newly compliant firms exhibit significant increases in liquidity consistent with improved disclosure reducing information asymmetry.

Authors

• Shifei Chung, Rowan University

• Mei Zhang, Rowan University

• Ramesh Narasimhan, Montclair State University