Potential Pilot Problems: Treatment Spillovers in Financial Regulatory Experiments

55 Pages Posted: 24 Jun 2015 Last revised: 25 Sep 2018

See all articles by Ekkehart Boehmer

Ekkehart Boehmer

Singapore Management University - Lee Kong Chian School of Business

Charles M. Jones

Columbia Business School

Xiaoyan Zhang

Tsinghua University - PBC School of Finance

Date Written: August 22, 2018

Abstract

The total effect of a regulatory change consists of direct effects and indirect effects (spillovers), but the standard difference-in-difference approach measures only direct effects and ignores potential indirect effects. By examining the short-sale aggressiveness during the 2007 full repeal of the uptick rule by the SEC, we find that short sellers become much more aggressive across the board, even in control stocks where the uptick rule is already suspended, which is consistent with positive and significant indirect effects on control stocks. In contrast, for the 2005 partial uptick repeal, short sellers become more aggressive in treatment stocks without an uptick rule, and less aggressive in control stocks with an uptick rule in place, which is consistent with negative indirect effects. We provide supportive evidence that the positive indirect effects in 2007 might be driven by aggressive broad list-based shorting, which includes both control and treatment stocks, and the negative indirect effects in 2005 might result from substitutions between control and treatment stocks. We conclude that regulatory pilot designers should carefully consider potential spillovers.

Keywords: interference, short sales, short interest, tick test, Regulation SHO

JEL Classification: G14

Suggested Citation

Boehmer, Ekkehart and Jones, Charles M. and Zhang, Xiaoyan, Potential Pilot Problems: Treatment Spillovers in Financial Regulatory Experiments (August 22, 2018). Columbia Business School Research Paper No. 15-67. Available at SSRN: https://ssrn.com/abstract=2621598 or http://dx.doi.org/10.2139/ssrn.2621598

Ekkehart Boehmer

Singapore Management University - Lee Kong Chian School of Business ( email )

Singapore

Charles M. Jones

Columbia Business School ( email )

3022 Broadway
Uris Hall Rm 101
New York, NY 10027
United States
(212) 854-4109 (Phone)

HOME PAGE: http://https://www8.gsb.columbia.edu/cbs-directory/detail/cj88

Xiaoyan Zhang (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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