Private Intermediary Innovation and Market Liquidity: Evidence from the Pink Sheets® Market.

In 2007, Pink Sheets LLC assigned each Pink Sheets® company to a disclosure tier and on its website affixed a colorful graphic to its stock symbol signifying the company's public disclosure level. This unique innovation allows us to investigate the impact of increased salience of disclosure practices on liquidity. Using a difference-in-difference design, we find evidence that firms classified into the Current Information category experienced an increase in liquidity while firms classified into the No Information category experienced a decrease in liquidity, both relative to other unclassified over-the-counter firms. This suggests that increases in the salience of disclosure practices via assignment to disclosure tiers affect investors' attention, leading to changes in trading behavior that ultimately translate into liquidity changes. We also provide evidence that some investors anticipated the resulting liquidity changes because stock returns around a key event date leading up to the release of the disclosure tiers are positively associated with subsequent liquidity changes. [ABSTRACT FROM AUTHOR]