The SEC's Short-Sale Experiment: Evidence on Causal Channels and on the Importance of Specification Choice in Randomized and Natural Experiments

78 Pages Posted: 21 Jul 2020 Last revised: 25 Jan 2022

Date Written: October 11, 2020

Abstract

During 2005-2007, the Securities and Exchange Commission (SEC) conducted a randomized trial in which it removed short-sale restrictions from one-third of the Russell 3000 firms (pilot firms). Early studies found modest market microstructure effects of removing the restrictions but no effect on short interest, pilot firm returns, or price efficiency. More recently, many studies have attributed a wide range of indirect outcomes to this experiment, mostly without assessing the causal channels for those outcomes. We examine the three most often cited causal channels for these indirect effects: short interest, share returns and managerial fear. We find no evidence to support any of these channels. We then reexamine the principal findings in four recent studies using a pre-specified research design (similar across the four reexaminations) and a larger sample that closely matches the actual experiment, and find no support for the reported outcomes in any of these papers. We then switch to best-match specifications that closely match the samples and specifications reported in each paper, and still find only minimal support for the reported results. For two papers, we have the authors’ original data and code; the reported results technically replicate but are highly fragile. Our findings highlight the importance of confirming a causal channel in randomized trials or natural experiments as well as the importance of sample selection and other aspects of specification choice for the statistical significance of reported results.

The Internet Appendix is available at https://ssrn.com/abstract=3657200.

Our pre-specified analysis plan is available at https://ssrn.com/abstract=3415529.

Keywords: natural experiments; causal channels; specification choice; Regulation SHO; SEC experiment

Suggested Citation

Black, Bernard S. and Desai, Hemang and Litvak, Kate and Yoo, Woongsun and Yu, Jeff Jiewei, The SEC's Short-Sale Experiment: Evidence on Causal Channels and on the Importance of Specification Choice in Randomized and Natural Experiments (October 11, 2020). Northwestern Law & Econ Research Paper 20-06, SMU Cox School of Business Research Paper No. 20-06, European Corporate Governance Institute – Finance Working Paper No. 813/2022, Available at SSRN: https://ssrn.com/abstract=3657196 or http://dx.doi.org/10.2139/ssrn.3657196

Bernard S. Black (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (Phone)

Hemang Desai

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-768-3185 (Phone)
214-768-4099 (Fax)

Kate Litvak

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

Woongsun Yoo

Central Michigan University ( email )

Mount Pleasant, MI 48859
United States

Jeff Jiewei Yu

University of Arizona ( email )

School of Accountancy
Eller College of Management
Tucson, AZ 85721
United States
520-621-1273 (Phone)

HOME PAGE: http://https://accounting.eller.arizona.edu/people/jeff-jiewei-yu

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